Is consumption sufficient to fuel growth?

• The economy’s growth is influenced by supply (production of goods and services) and demand (expenditure for purchasing these goods and services).

• If supply is slower than demand, prices rise, leading to inflation.

• If demand falls behind, firms may have unsold inventories, leading to cuts in future production, job and income losses, and a worsening cycle of demand and growth slowdown.

Four Sources of Aggregate Expenditure

• Private consumption: The sum of expenditures by all individuals on items such as food, clothing, and mobile phones.

• Private investment: The amount spent by firms and households on installing new machines and constructing new factories or residences.

• Government expenditure: The money spent on day-to-day government operations, including paying salaries to officers, teachers, doctors, etc. attached to public institutions.

• Net exports or exports minus import of goods and services while engaging in trade with the rest of the world.

Investment and its Multipliers

• Investment stands out for its ability to create’multiplier effects’. An increase in investment of ₹100 could increase the economy’s overall demand and GDP by more than ₹100, with the multiplier being 1.25.

• The multiplier effect arising from increased consumption is weaker than investment.

Indian and Chinese Experiences

• In the early 1990s, the per capita incomes of India and China were almost the same.

• By 2023, China’s per capita income has grown to five times as high as the Indian level.

• China’s investment rates have been significantly higher than India’s from the 1970s onward.

• India’s economic growth over the last decade has been driven mainly by expanding domestic consumption expenditures.

• Economic growth driven by consumption is slower than investment-led growth and aggravates inequalities.

• There has been a stagnation in the growth of investment by the public and private corporate sectors in India.

• The government needs to step in with its investments, particularly in critical sectors, to boost private sector confidence and help spread the benefits of growth to the broader population.