Where is Indian economy heading? Is it stable? Moving upward or sliding downward? Gross Domestic Product which was to attain double digits by the end of 11th Plan, after many changes, alterations, touched 7.8% as against 8.3% of 2010-11 and 9.6% of 2006-7. The Index of Industrial Production (IIP) had been showing a downhill growth (base 2004-5=100) while the growth percentage in manufacturing has been sliding ever since Dec 2010. To be specific, automobile sector which produced a growth rate of 30% a few years ago posted 4.3% last fiscal. Recently, the Governor of the Reserve Bank of India lamented that ‘policy prescriptions of the apex bank provide ineffective, because of the bewildering quality of data) has confounded confusions. Though the mood of the country is optimistic, no body has any clarity on its future. RBI has raised the interest rates (they had been doing this rather ritually) citing a] inflation b] food inflation c] international economic turmoil, but has no prescriptions for controlling the continued inflation rate growing up without respite.
The Planning Commission, which pilot schemes to deliver growth through Plans are in a bind because of the blind assumption of theories? Every time, it comes with a growth rate to discard it in every alternate month and announcing a new growth rate which shows a reduced figure. We find that after spending Crores of Rupees, Indian agriculture seems to stand at the cross roads. Its recorded growth rate during one of the years of the 11th Plan was -0.1%. The planned growth rate was 4% against which huge outlay was made. From 2004, the Agriculture Ministry is headed by the same minister who should have taken responsibility. But he blames rains, monsoon, and draught, for deficit agri growth. If the Prime Minister of the day cannot enforce accountability of the Hon’ble Minister of Agriculture due to coalition dharma, could he not exercise the constitutional dharma?
The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has been responsible for higher food consumption, contends the Government. As poor people are eating more, the prices of food stuffs have gone high and hence food inflation argues Government economists. The Scheme has an allotment of around Rs 40,000 Cr annually, which is split into 60:40 ratio, 60% for food and 40% for materials. Though the laudable objective was to provide employment for 100 days at the least, not more than 40 days of labour, presently,
is provided to an individual. Central Statistics Organization estimated that Rs 16.20 lakh Cr for consumption expenditure of food. Even assuming that the beneficiaries used all the Rs 28,000 Cr for food, it works to 1.7%, showing that these people do not cause any upheaval on supply constraints in agriculture. Supply side and cost factors are responsible for high inflation in food. We import around 20% of our pulse requirement and 70% of edible oils which results in international prices going up to cater to India’s supply constraints. Hence imported inflation gets into our system. Further, 40% of the crop is wasted due to absence of logistic support.
Coming to the Yojana Bhavan, they ear-mark money without knowing the ground reality. To illustrate a point, after spending Crores of Rupees, distribution of essential commodities at a very low price through PDS, we find the number of BPL Families is increasing YoY. The population of BPL may increase, but to say the number of BPL families is increasing is mysterious. There is something wrong, somewhere? This arithmetic needs to be explained.
Economic Development initiatives differ from Economic Growth. Economic Growth is one aspect of economic development. Economic growth is a policy intervention. Economic Development is static theory that documents the state of economy at a certain time. Rising interest rates scenario has seen the money loosing its value. Inflation has reduced real returns, and our economic experts in the North Bloc are wondering how to tame inflation. Prime Minister candidly admitted as much. All the reasons why economic growth has gone hay wire is due to negative global cues, debt restructuring by Greece, weak world wide economic data are a few among the number of reasons for putting the experts in a fix(contends the experts of North Bloc). American market is universal. If anything goes wrong there, world economy is in bubbles.
Inflation causes uncertainty about future prices, interest rates, exchange rates, promoting risks, discouraging trade. Inflation was around 9% and food inflation was in the neighborhood of double digits expected to escalate to double digits. In spite of repeated interest rate hikes, inflation rates have been consistently going up showing no signs of slowing down. Inflation brings down the Net Asset Value (NAV) of funds like Securities. Consistent high inflation has been impeding growth.
Gross Domestic Savings which constituted 10.3% of GDP (1950-55) went up to 36.4% (2006-7) mainly due to active interest rates and anti inflation policies resulting in higher household financial savings which rose from 1.6% of the GDP to 10.6% during this period. Public sector savings declined from 1.7 %( 1950-55) to 0.6 %( 2003-4) which saw Public investment giving way to Private investment in terms of GDP. Foreign and domestic MNCs, FDI, SEZ concept was responsible for rapid capital formation and accumulation. Growth was a casual factor in India’s capital accumulation. Money supply falls as interest rates are high, which discourages savings. Economic growth is reduced because economy needs certain level of Savings to finance investments which boost economic growth. Inflation and high interest rates disrupt the operations of a nation’s financial institutions and discourage its integration with the rest of the Markets.
The growth surge in India has been on a low from 9.5% in 2005-7, 6.7 %( 2008-9). 7.4 %( 2009-10). Was it neo-classical (a la ROBERT M Solow & T W Swan Concept?) which emphasized the role of Savings- translated into investment, in economic growth? B) Was it demand driven (John Maynard Keynes theory) where ‘x’ amount of expenditure even if not backed by Savings, would lead to a multiple ‘yx’ of income? C) Was it economic growth and rising incomes that triggered both savings, investment (Arthur W Lewis, Capitalist surplus concept)? D) Or was it technology innovation that shifted up the growth path trajectory and endogenised technical change (Paul Romer hypothesis)? E) Or was it Manmohanmics? No great economy is generated without innovation or invention and embedding them in the growth process. This is India’s missing link (Parthasarathi Shome)
In India, presently, standard of growth is measured by the Gross Domestic product . Dr Amrtya Sen, Nobel Prize recipient believed that Human Development is the real measure for progress compared to the material output. Human development Index, according to him, is the composite index of achievements in human development. Shri Mahubul Huq had also pleaded for Human development growth to be considered as a measure for progress and growth of a Country.
Consumption is proving to be a major force driving India’s GDP growth.
Private sector ‘output’ is measured by the Price, people are prepared to pay. Government’s output is measured by its Costs. GDP increase is proportional to its spending-productive/non productive. When VI Pay Commission pay was released, it increased the growth rate, even though it only created higher disposable incomes in the hands of the Government servants who seldom used it towards saving it or in investment. We order Planes. We conceive projects. These costs are factored in the GDP. Most of the budgets of projects get plagued by huge cost overruns which sometimes may lead to its cancellation. These are added to the GDP. Public funding stimulus programme are effective means of raising the percentage of GDP. Their costs are simply added to the ‘output’. In order to shelter importers of edible oil whose import landing prices are stimulus imports with tax cuts, which nevertheless increase consumption though the income with profits, is garnered by another Country? This when factored in the GDP allows it to grow in its percentage. Stimulus in this case, has fuelled growth in importing countries rather than the Country of import. Government spending stimulates economic growth. This mathematical engineered economic growth in the GDP, does not translate to Economic welfare, though it enlarges the percentage of GDP growth. Private Sector initiatives would have created wealth at lower cost and generated greater output and provided large scale employment, none of which is provided by the stimulus consumer spending through import with tax cuts.
In Economics, most things created are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.
Gross Domestic product refers to the market value of all final goods and services produced in a Country in a given period. The GDP can be measured by a) income approach b) Expenditure approach c) Product or output method. India has been adhering to the Expenditure approach for calculating the Gross Domestic Prdouce.
GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
Y = C + I + G + (X − M)
Here is a description of each GDP component:
C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but do not include the purchase of new housing.
I (investment) include business investment in equipments for example and do not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.
G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.
X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic. Fully equivalent definition is that GDP (Y) is the sum of final consumption expenditure (FCE), gross capital formation (GCF), and net exports (X – M).
Y = FCE + GCF+ (X − M)
FCE can then be further broken down by three sectors (households, governments and non-profit institutions serving households) and GCF by five sectors (non-financial corporations, financial corporations, households, governments and non-profit institutions serving households). The advantage of this second definition is that expenditure is systematically broken down, firstly, by type of final use (final consumption or capital formation) and, secondly, by sectors making the expenditure, whereas the first definition partly follows a mixed delimitation concept by type of final use and sector.
Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and Services are those used by businesses to produce other goods and services within the accounting year.) In exports, transaction costs are about 40-45%, with inefficient turnaround time which upsets the delivery schedule. Unorganized sector output which has is regionalized and geographically centric does not fully figure in the GDP.
Keynesian theory which got reflected during World War II got America out of depression which suggests that bigger the stimulus, greater is the percentage of GDP growth, which solves economic problems. Keynes preferred to split the general consumption to two parts, private sector consumption and public sector (government) spending. Government consumption can be treated as exogenous so that different government spending can be brought within a meaningful macro economic framework.
Persistent inflation is regarded as a Post -World War II phenomenon, which suggests a positive co-relation between inflation and growth. Under the Aggregate Supply- Aggregate Demand framework, there is positive relationship between Inflation and Growth. As growth increased, so did inflation. AS curve is upward sloping rather than vertical which is a critical feature? If AS curve is vertical, changes in the demand side of the economy affects only prices. There is positive co-relation between personal savings and rate of increase of inflation. Inflation co-relates to a rise in prices as measured by Consumer Price Index. A rise in price means inflation is on the run. Price rise because consumers have a higher income and more money is in circulation. If the money supply extends too quickly, prices escalate and people’s savings worth comes down.
Economists like Paul Krugman, has articulated the position of Keynes on GDP based on government sending. When expanded as a lousy growth, slower than population growth, then the growth rate achieved is negligible. Gross private Product (GPP) which involves the total output of the private sector which has been investing overtaking the Public investment in cardinal sectors of the economy thanks to its release from government monopoly and Government’s spending on schemes which have utility and populist value, cannot determine the growth rate of the Country.
However, measuring Private enterprise output in terms of its price and government’s spending becomes the criteria to measure growth rate in GDP, would it indicate the correct measurement of growth? Keynes formulated his thesis in the context of a closed economy. Neither massive stimuli nor austerity budget is likely to produce much needed growth. A lower export to GDP ratio would indicate that exports contribute to a lesser amount to the GDP and greater portion of economic growth will be internationally driven instead of internally driven or consumer driven. Without growth, debt/GDP ratio will keep worsening.
Conclusion:
There are many Economists who share the view that Expenditure approach is not the realistic way to calculate GDP. It is not an accurate measure to establish the growth rate in an economy. The present system needs review.
