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The structural change in the Indian economy

The structural change in the Indian economy
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First Published: Sun, Feb 21 2010. 11 24 PM IST

Updated: Sun, Feb 21 2010. 11 24 PM IST
The ongoing recovery from the current downturn will be driven by investment—that’s the message that comes through from the gross domestic product (GDP) growth estimates put out by the Prime Minister’s economic advisory council (EAC).
The numbers show that the Indian economy is going through a structural change, with the share of consumption in the economy declining, while that of investment rises. Five years ago, in 2004-05, the share of investment in GDP at market prices was 32.7%, while that of consumption (both private and government) was 70.5%. Of this, private consumption was 59.5% of GDP, while government consumption was 11%.
By 2007-08, the share of investment had increased to 37.7%, while the share of consumption dipped to 67.5% (57.1% private consumption and 10.4% government consumption). This is the natural result of a higher domestic savings rate. The pay hike for government employees, the spending on poverty alleviation schemes, the waiver of farm debt and excise duty reductions all boosted consumption during 2008-09 and 2009-10, while the climate of uncertainty led to a drop in the share of investment. But now that the economy is projected to rebound to 9% growth in 2011-12, investment, too, is expected to make a strong comeback. EAC predicts that in 2011-12, investment will rise to a new high of 38.2% of GDP, while consumption will fall to 65.8% of GDP. Interestingly, the share of investment in 2011-12 is projected to be even higher than its 37.7% share of GDP in 2007-08, at the height of the last boom.
Graphic: Ahmed Raza Khan/Mint
The share of investment in India is now approaching that of China’s, which invested an average of 40.7% of its GDP in the five years ended 2008.
That will help reduce the huge infrastructure constraints the country faces. Interestingly, despite the lukewarm rate of growth of bank credit, growth in bank funding to infrastructure has been very high indeed—the Reserve Bank of India data show that for the year ended 20 November, the latest date for which the disaggregated numbers are available, loans for infrastructure increased by 47.2% on an annual basis.
EAC has warned that while there’s a need for reducing the government’s fiscal deficit in the forthcoming Budget, it should not happen at the cost of spending on infrastructure. The EAC report is unambiguous on this, underlining that “there is no scope for compressing capital expenditures while undertaking fiscal correction”.
EAC estimates the growth rate for consumption expenditure to increase by 6.2% in 2010-11, higher than the 4.9% growth in the current fiscal year. But growth in gross domestic fixed capital formation is forecast to rise from 5% this fiscal to 12.8%. That should boost order books and growth for capital goods companies.
Write to us at marktomarket@livemint.com
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First Published: Sun, Feb 21 2010. 11 24 PM IST