Long term trends suggest India’s growth story is kept alive through higher government expenditure: GDP from public administration has now surpassed the GDP from the agriculture sector.
Even if you are an economist, a look at India’s economic data may catch you by surprise. India is perhaps the only large economy in the world which is growing at at a little over 6.5% and yet this growth rate is not supported by several fundamental micro and macroeconomic indicators.
The common man on the street, and small and medium-sized entrepreneurs, will vouch for a fall in overall demand, especially post-demonetisation. Most market pundits will echo similar sentiments by citing some micro-level data. There has been a fall in the production of automobiles, two-wheelers and cement. Exports and imports are down. In fact, the service PMI (purchasing managers’ index), which tracks sales, employment, inventories, and price data of private service sector companies has shown a sharp decline in recent months. This pessimistic business outlook is also reflected by a fall in foreign direct investment. After all, services is an important sector, contributing to 67% of India’s national income.
The million-dollar question is what exactly is keeping India’s growth story alive. Or put another way, can India sustain this growth? There are five components of demand: consumption expenditure, investment expenditure, government expenditure, exports, and imports. The most important component of demand is consumption expenditure, which accounted for 70% of national income in 2016.
Although the consumer spending data has shown a tepid increase, the bug lies in agricultural income, which supports the livelihood of around 60% of India’s population. However, recent data can be an anomaly. It may be because of the disruption caused by demonetisation. Therefore, it makes sense to look at five year long average data (capturing the trend) for these indicators.
Long term trends suggest India’s growth story is kept alive through higher government expenditure. Most of this government spending is because of implementation of government programmes and maintaining various government departments. Recent estimates shows GDP from public administration has now surpassed the GDP from the agriculture sector.
It makes sense to spend on infrastructure. The Make-in-India project, aimed incentivising manufacturing in India, will not be possible without having world class roads, ports and railways. And one has to give credit for government increasing funds for the infrastructure sector.
However, money spent on maintaining various government departments is unworthy. For instance, the department of sericulture could be merged with agriculture. At the time of e-governance, better delivery of public services can happen through a leaner, thinner and stronger (read, productive and transparent) government department.
(Five years average)
(Latest available data: yearly, quarterly and monthly)
|Car production (monthly)||220000 units||208045 units|
|Cement production (monthly)||22000 thousand tonnes||20516 thousand tonnes|
|Service PMI data (quarterly)||51.5||46.8|
|Foreign Direct Investment (monthly)||USD 2200||USD 2000|
|GDP from Agriculture (quarterly)||Rs 3900 billion||Rs 3095 billion|
|Consumer Price Index (monthly)||7.4%||3.4%|
|Food Inflation (monthly)||8%||1.4%|
|GDP from Public Administration (quarterly)||Rs 3050 billion||Rs 3861 billion|
|Consumer Spending (quarterly)||Rs 14800 billion||Rs 16256 billion|
|Government Spending (quarterly)||Rs 2790 billion||Rs 3840 billion|
|Expansion of Infrastructure Output (quarterly)||4.2%||4.9%|
|Steel Production (monthly)||7200 thousand tonnes||8200 thousand tonnes|
Source: Trading Economics and Government of India.
Sustaining this 6.5%-plus growth and generating consumer demand will also require transferring funds to the poor and the deprived so that distribution of income becomes more equal. In India, around 26.1% of its 1.27 billion population lives below poverty line and 63 million people have been driven into poverty due to high cost of healthcare and education. In this age of 3D printers and data algorithms, when manufacturing process is increasingly becoming mechanised, there is a need to incentivise the micro, small and medium enterprises (MSME) sector.
The current problem with MSME sector is access to finance. A flourishing MSME sector is needed for employment generation. India has a growing young population, with two-third of its population below 35 years of age. Also the need of the hour is to increase investment in rural infrastructure, particularly because we still have to depend on rainfall for robust agriculture output.
There are some talk about giving universal payment to the poor. Although at present, the government budget deficit and inflation are both under control, it is not a good idea. A better idea would be to give incentives for skill-development.
Likewise, decreasing tax rates to increase demand may not be a good idea especially when a meagre 1% of India’s population pays income tax. Data indicate there are only 24 lakh people who have income above 10 lakh. Ironically, Indians bought 25 lakh cars every year since 2011. Decreasing tax rates for sure will increase tax buoyancy but its impact on raising consumption demand is questionable.
In short, for the forthcoming budget, the finance minister has to look for ways to increase consumption demand. How he does that we will see on 1st February.
Nilanjan Banik is a professor at Bennett University.