Daily Current Affairs – 27th August, 2016DEVENDRA VISHWAKARMA
Looking for possible ‘green shoots’ in our economy
- ‘Green shoots’ is a popular phrase used to describe signs of economic recovery.
- RBI Governor Raghuram Rajan was the first to talk of spotting ‘green shoots’ in the Indian economy.
This article analyzes where the economy is headed. Will there be possible ‘green shoots’? If yes, in which sectors?
Expenditure method for calculating GDP
Since everything that is produced by the economy is purchased, one method of measuring GDP is by measuring total expenditures.
- The expenditure method is a method for calculating gross domestic product (GDP), which totals consumption, investment, government expenditure and net exports.
i.e., GDP = consumption + investment + government expenditure + exports – imports.
- A closer look at these components will give us a fair idea of the bright spots and those areas which are still struggling to rear their heads.
In a developing economy, usually the consumption component of GDP is relatively large. This is because:
- When the income of households is small, a large part of it goes into consumption-related items — be it food, education or medical expenses.
- The remaining portion that is saved, comes back as ‘investments’ or gets taxed by the government.
India, which is a developing economy, has largely been a consumption-driven economy.
- About 58 per cent of its GDP, as measured by the expenditure method, comprises consumption expenditure.
- Investments, which are essentially capital investments, account for 27 per cent.
These two components together constitute 85 per cent of GDP, making them crucial drivers for the Indian economic growth.
Usually, as the income level of an economy rises, the consumption component increases.
According to Keynesian theory, an increase in production increases consumers’ income, and they will then spend more. If we know what their marginal propensity to consume is, then we can calculate how much an increase in production will affect spending. This additional spending will generate additional production, creating a continuous cycle. The higher the MPC, the higher the multiplier—the more the increase in consumption from the increase in investment.
- While we consider last five years, the share of consumption expenditure in the Indian economy has improved while that of investments fell.
- So, which areas within consumption have shown a growth over the last few years?
When we look at indicators that capture trends in consumption, such as — consumer confidence index, IIP figures to automobile sales and monsoon data, it provides good news.
i.e., the consumption trend is up and eight out of 10 consumption-based indicators show an uptick in growth figures.
- Consumer Confidence Index (CCI), which tracks the sentiment among household consumers, was up.
- Urban consumers have grown: Continuing demand for consumer credit shows that Indian consumers, especially the urban lot, are continuing to buy consumer goods.
- Auto producers have made the most of the growing demand from urban India by showing strong growth in the recent past.
- Improving consumer sentiment as well as pick-up in sales of cars, motorcycles and tractors indicates that rural and urban consumer demand is robust.
The Investment component, while a relatively smaller component of the GDP, also has close linkages with the rest of the economy.
It is not entirely upbeat in the investment segment. While green shoots are visible in some pockets, some areas are still struggling. Eleven out of 20 investment-based indicators showed uptick in growth figures.
Performance of core sectors:
Among the core sectors, production growth is higher in coal, steel, cement and electricity generation.
The growth in steel production has moved from the negative to the positive territory which, to a large extent, has been helped by protectionist government policies in recent times.