Primer | What’s driving Indian GDP surge: Public spending or private consumption

In nominal terms, the projected GDP growth for FY24 is 8.9 percent, a notable deceleration from the 16.1% recorded in the preceding financial year.
In nominal terms, the projected GDP growth for FY24 is 8.9 percent, a notable deceleration from the 16.1% recorded in the preceding financial year.

Summary

  • Massive capex spending, experts say, has caused GDP growth to accelerate. Private investment, they say, is also showing signs of revival.

The general take on India’s rapid economic growth is that it’s powered by the government’s capex push. But a recent report questions this narrative, saying it underestimates the role of consumption. Mint unpacks the investment versus consumption debate.

How fast is the Indian economy expanding?

India is the fastest growing large economy in the world. In FY2022- 23, its gross domestic product or GDP grew by 7%. However, in the just-concluded fiscal year 2023-24, its economy has been expanding at an even faster pace. In the first three quarters it expanded at a pace of 8.2%, 8.1% and 8.4% respectively. The government estimates the full year’s growth at 7.6%. In comparison, other major economies are projected to grow at a much slower clip. According to the International Monetary Fund, China is expected to grow at 4.6%, the US at 2.1, France at 1%, Japan at 0.9% and UK at 0.6%.

What is fuelling this growth?

With three of the four engines of economic growth—public consumption, exports and private investment—subdued, it is public investment, specially spending on infrastructure, that has been powering India’s growth. The Centre has been spending a lot on capex in a bid to pump-prime the economy and revive private investment. Its budgeted capex has doubled from 1.7% of GDP in FY19 to 3.4% in FY25. States have also been incentivized to spend more on capex. This massive spending, experts say, has caused GDP growth to accelerate. Private investment, they say, is also showing signs of revival.

Does everyone subscribe to this view?

No. In a recent report, HSBC, the global financial services major, argues that India’s strong GDP growth is not powered by public investment—that is the massive capex spend. Rather, it is on account of consumption, which the study claims is much stronger than what GDP data suggests. It also questioned that there were signs of revival in private investment.

What is the basis of the argument?

The report says the effect of public spending has been overstated. While the Centre’s capex has risen sharply, investment by central public sector enterprises (CPSEs) have fallen. Taken together, capex by the Centre and CPSEs has declined to 3.9% of GDP in FY24 from 4.9%in FY20. It says GDP data underestimates consumption, arguing consumer goods imports are 30% higher than pre-pandemic levels, private service consumption is strong and personal loans are growing faster than housing loans. 

What does this mean for GDP numbers?

Upward revision in consumption will not increase GDP growth. Instead, a redistribution will happen between investment and consumption in future revisions of GDP data. If that happens the gap between investment and consumption will narrow from six percentage points now to two percentage points in line with the long-term average—a better balance. The report also says higher consumption has not triggered core inflation, due to the lower cost of imports from China and soft commodity prices.

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