The government’s estimates of Gross Domestic Product (GDP) at current prices for the current fiscal year show that the share of private consumption in GDP is the highest in, at least, the last 15 years. Private consumption is estimated to account for 59.48 per cent of GDP this fiscal, the highest share since 2004-05 (The accompanying chart shows the trend). If you want to compare, China’s household consumption as a share of GDP was around 38 per cent in 2017, according to the World Bank.
Government consumption too has been rising and in the current fiscal year, it is estimated at 11.18 per cent of GDP at current prices, the highest share since 2009-10, when the government boosted spending in the aftermath of the global financial crisis.
Taken together, private and government consumption account for as much as 70.66 per cent of GDP this year, which too is the highest since, at least, 2004-05, the earliest year for which we have the current GDP series.
There are many reasons for the rising share of consumption. For one, investment demand has remained tepid.
Gross fixed capital formation, which was 34.31 per cent of GDP in 2010-11 is at 28.87 per cent in 2018-19. The boost to consumption by the implementation of the Pay Commission recommendations has had an impact. It’s possible that the fall in inflation may have led to more spending. And the introduction of the Goods & Services Tax (GST) and the periodic downward revision in its rates may have spurred consumption.
But the rise in private consumption has also been fuelled by increasing debt.
Estimates by Nikhil Gupta and Rahul Agrawal of broking house Motilal Oswal show that household debt has risen from 29 per cent of GDP in FY15 to 33.1 per cent in FY18. Looking further back, household debt was a much lower 22.2 per cent of GDP in FY05.
Personal loans as a proportion of non-food credit advanced by banks went up from 18.8 per cent in the December 2013 quarter to 25.7 per cent in the December 2018 quarter.
Include other loans, such as auto loans given to individuals and lending by non-banking financial companies, and the rise in debt among households will be substantially higher.
Indian households are also saving less. In a research report last August, Nikhil Gupta and Rahul Agrawal wrote, “Private consumption growth has outpaced income growth at a time when household savings have fallen to the lowest level in more than two decades and total debt (institutional and non-institutional) has risen to an all-time high.”
Should we be worried? Household debt in India is still well below the levels in many emerging markets. Nevertheless, the Reserve Bank of India’s Annual Report for 2017 warned, “Consumption as a driver of growth has been associated with low growth multipliers ... with some evidence that side effects such as rising household indebtedness could turn out to be growth-retarding in the medium term.”
And finally, in the gross value added (GVA) data at current prices, the sector, ‘public administration, defence and other services’, a proxy for government spending, is estimated at 14.6 per cent of GVA this fiscal compared to 12.56 per cent five years ago.
Five years back, didn’t someone talk of minimum government?
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