The gross domestic product (GDP) data for the December quarter, released on Friday, were lost in the excitement of the Union Budget.
The question the numbers were supposed to answer was: Can the economy sustain growth if government stimulus is withdrawn?
The September quarter GDP numbers had shown that, despite the high headline growth of 7.9%, if growth in government’s final consumption was left out of the picture, the growth rate had fallen in the rest of the economy. That trend, thankfully, has not continued in the third quarter.
The chart shows what the growth rates of GDP at market prices (2004-05 prices) would be if the government’s final consumption expenditure is taken out of the total GDP numbers. Notice the sharp rebound in growth of the non-government part of the economy to 8.5% in the December quarter, up from 4.8% in the September quarter. But here’s the catch—growth was negative in the year-ago period, so the third quarter growth is exaggerated. As a percentage of total GDP, the government’s final consumption expenditure was 11.6% of GDP in the December quarter, higher than its 11% share in the September quarter.
Indeed, compared with the September quarter, the December quarter saw a substantial decline in the share of gross fixed capital formation, from 35.1% to 32.6% of GDP. Private consumption expenditure, at 60% of GDP in the December quarter, was a bit more than its share in the September quarter. Interestingly, changes in stocks accounted for 0.7% of GDP, the same as the September quarter—in 2006-07 and 2007-08, changes in stocks accounted for at least 3% of GDP. That’s a sign of how cautious business has become. The good news is that once the recovery takes hold and business revives, restocking will provide another boost to GDP.
Given the comparatively high proportion of government consumption in the December quarter GDP, the finance minister was right in adopting a cautious stance on rolling back the deficit.
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