Is consumption enough to drive growth?
(Source – The Hindu, International Edition – Page No. – 10)
| Topic: GS3 – Indian Economy |
| Context |
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Understanding Economic Growth: Supply and Demand Balance
- Economic growth depends on supply (production of goods and services) and demand (expenditure to purchase these goods and services).
- If supply grows slower than demand, inflation occurs. If demand lags, firms accumulate unsold goods, leading to reduced production, job losses, and economic slowdown.
Sources of Demand in the Economy
- Private consumption: Individuals spending on food, clothing, and personal goods.
- Private investment: Firms and households investing in machinery, factories, and residences.
- Government expenditure: Includes spending on salaries, infrastructure, and development projects.
- Net exports: The balance of exports and imports in foreign trade.
Investment and Its Multiplier Effect
- Investment has a stronger impact on GDP growth than consumption.
- Example: A ₹100 investment can generate more than ₹100 in overall economic growth due to the multiplier effect.
- Investments in infrastructure (like highways) lead to job creation, business expansion, and overall economic growth.
- The multiplier effect varies depending on the type of investment and regional development.
Comparison of Economic Growth Between India and China
- In the early 1990s, India and China had similar per capita incomes.
- By 2023, China’s per capita income was five times higher than India’s (2.4 times after adjusting for purchasing power).
- China’s economic growth was investment-led, whereas India’s growth was driven by domestic consumption.
Investment Trends Over Time
- In 1992, China’s investment rate was 1% of GDP, while India’s was 27.4%.
- By 2007, the investment gap narrowed, but after the 2008 financial crisis, both countries responded differently.
- China increased investment in infrastructure, manufacturing, and technology, while India’s investment rate fell sharply after 2012.
- By 2023, China’s investment rate was 3%, and India’s was 30.8%.
Challenges in Investment-Led Growth
- Over the last decade, India’s economic growth has been consumption-driven, while China’s growth has been investment-driven.
- In 2023, consumption as a share of GDP was 60.3% in India compared to 39.1% in China.
- Weak investment, low government spending, and trade deficits contribute to slower economic expansion in India.
- Investment-led growth creates more jobs and reduces income inequality, whereas consumption-driven growth worsens income inequality.
Government’s Role in Investment
- Investment by households and private firms in India has stagnated in recent years, except for residential real estate in the early 2010s.
- Private firms in India are reluctant to invest due to weak business confidence (low animal spirits).
- The Indian government needs to increase spending in critical sectors to stimulate private investment.
Concerns Over Government’s Policy Approach
- The Indian government has not significantly increased investments in the latest budget.
- Instead, policies have favored tax concessions and a low-growth path dependent on consumption, benefiting primarily middle and upper-class consumers.
- Without a strong public investment push, India’s economic growth will remain slow, and inequalities may worsen.
| Practice Question: How does investment-led growth compare to consumption-driven growth in terms of economic development and income distribution? Analyze its implications for India’s growth strategy. (150 Words /10 marks) |
