India - A consumption based economy - Seeker's Thoughts

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Saturday, 22 September 2018

India - A consumption based economy

India is shining star in GDP, which is growing gradually and remarkably. GDP or gross domestic product is the total of all the prices of finished goods and services for a period of time.
The value of GDP can be based on various factors- first investment – that means the companies are getting huge investment and growing. Second factor is consumption, when population consumes a lot so the production has to increase.
India is consumption based economy not lead by the investments, however, there is not denying that investments are growing.
India’s GDP is estimated to have grown at 8.2% in Q1 2018-19 which is the highest quarterly estimate ever put out under the incumbent government etc.
Faster growth has come on a low base which has produced a statistical effect, making growth appear faster. This is partly correct.

Challenges and facts that economy is consumption based--

·         The dollar is increasing, while rupee is losing its value. When rupee loses its value, it promotes export but other sectors are badly affected which are import based. 
·         The NPA problem is on rise, and all efforts to tackle it are very slow. 
·         Trade deficit is also higher, and above that fuel prices are on rise. 
·         Data shows that private consumption was 54.9% of GDP at constant prices in the June quarter, compared to 54.6% in the March quarter. Clearly, consumption growth is very strong. It has to be converted into investment lead growth.
·         Consumption growth has been supported by the rise in personal lending
·         Private consumption expenditure growth has quickened, relative to the preceding quarter, as well as compared to the same quarter last year.
·         Government salary and pension hikes including at the State level are feeding this consumption spree.
·         Consumer industries are also reporting robust rural sales growth.

The reason for worry
  1. Consumption-led growth is sustainable up to a point, especially if it is financed by expanding the government deficit. That means government is still making the loss economically and giving money to promote various sectors. The high growth in the years before the global financial crisis was driven by savings and investments. After the global economic downturn disrupted that trend, an investments shortage followed. That meant that India never received proper investments. 
  2. The negative side is that in the process of capacity creation, there will be rising debt burdens, particularly for households.
  3. Economy is still not out of the investments slowdown. The investments are reducing due to NPA crisis.
  4. Ranging from rising international crude prices to the risk of inter-country trade wars, these are likely to keep the current account deficit and therefore the rupee under stress.
  5. The Reserve Bank of India can hike interest rates to arrest the rupee’s depreciation as it has been constantly falling. But that will further increase the cost of borrowing, including the government’s debt.
Conclusion

The good thing is that the Indian economy has been growing, but ignoring facts and only celebrating will lead to further chaos. India should give special attention to tackle NPA problems, and work against other challenges to get more investment.