Non-govt GDP growth paints a grimmer picture

GDP is basically the sum of private consumption expenditure, government expenditure, investment and net exports. Leaving out government expenditure from GDP, what remains is the non-government part of the economy. This grew 3.05% in July-September and was 150 basis points lower than overall growth of 4.55%. One basis point is one hundredth of a percentage point. The non-government part tends to form 87-92% of the economy. In the July-September period, it formed nearly 87% of the economy. If 87% of the economy is growing at 3.05%, the situation is much worse than it seems.

How then did the economy grow 4.55%?

The government expenditure grew by a whopping 15.64% and in the process pushed up economic growth to 4.55%, though a large part of the economy grew by just 3.05%. The government expenditure in the period from April to September 2019 went up by 12.34%. This helped the economy grow by 4.78%. This has been the trend largely over the last two years, with the government expenditure growing by 14.97% and 9.25% in 2017-18 and 2018-19, respectively, faster than other entries that make up GDP. The Keynesian fiscal stimulus is at work and has helped push up growth.

How bad is the situation on the non-government front?

The growth of 3.05% is the third slowest for the non-government part of the economy over the last 15 years. The slowest two periods of growth were from October to December 2008 and January to March 2009, when the effects of the financial crisis that broke out in September 2008 were felt. At present, there is no such crisis.

Where is this lack of growth visible?

The lack of growth is visible in a host of high-frequency economic indicators that Mint regularly tracks. It is also visible in investment growth, which collapsed to 1.02% during July-September, the slowest in nearly five years. Consumption growth was at 5.06%, better than the 3.14% growth between April and June, but slow nonetheless in the overall scheme of things. The formula of consumption driving consumption in the Indian economy has gradually broken down during the course of this year.

Is the govt spending more a way out?

Economists want the government to spend more, but it is already spending a lot more than it usually does. The higher spending has led to higher government borrowing, effectively rendering RBI’s monetary policy useless. Banks haven’t cut lending rates despite RBI reducing the repo rate by 135 basis points to 5.15% during 2019. The weighted average lending rate of banks in December 2018 was 10.35%. By September, it had jumped 10 basis points to 10.45%.

Vivek Kaul is an economist and the author of the Easy Money trilogy