Economic atrophy

The disturbing aspect about the just released quarterly data on gross domestic product (GDP) is not so much the overall growth slowing to an annual rate of 5.3 per cent during July-September, disappointing though it is. Rather, it is the more pronounced slowdown in fresh investment and private consumption activity that is cause for concern. According to the estimates put out by the Central Statistics Office, gross fixed capital formation (GFCF) – the metric for incremental production potential created in the economy – registered a growth of only 4.1 per cent over the July-September quarter of 2011-12. Similarly, private final consumption expenditure – a useful proxy for measuring the economy’s capacity for growth in the near term – grew by just 3.7 per cent. And both these numbers were lower than the overall GDP growth of 5.3 per cent.

It is the niggardly increase in GFCF levels that captures the real essence of the slowdown gripping the Indian economy roughly since the second quarter (July-September) of last fiscal. The fundamental characteristic of any dynamic emerging economy is the accumulation of capital stock, which increases at a faster rate than GDP itself. This was, indeed, the case during the period from 2004-05 to 2010-11, when the annual expansion in GFCF averaged 14 per cent, more than the corresponding 8.4 per cent growth in GDP. Even for as late as the April-June 2011 quarter, the growth in GCDF (14.7 per cent) exceeded that of GDP (8 per cent). Since then, investment has faltered more than GDP, the effects of which are now getting reflected in consumption as well. The logic for that is simple: Investment is what creates new jobs, without which there can be no increase in incomes either. Once that stalls, compounded by fears of even existing jobs being retained, it leads to a slowdown in private consumption expenditures, as the data for the last two quarters clearly shows.

So, how is the economy still growing at 5.3 per cent, despite both the investment and private consumption engines more or less stalling? Well, one reason is Government spending, that too on salaries, pensions and other current expenditure heads. These have actually posted an increase of 8.7 per cent in July-September over last year’s level. There are obvious limitations to any growth strategy dependent on Government expenditures, especially those that create no new productive assets in the economy. The right strategy now should be for the Government to redirect its own expenditures from consumption to investment. This, along with conscious efforts to remove various policy and administrative hurdles – including those relating to land acquisition and environmental clearance – discouraging private businesses from investing, would help restart the process of capital accumulation and generation of new jobs. That is the only viable and sustainable growth path for emerging economies, India being no exception.