Household Spending is on Hold, Yet Economy is Growing!

The government recently released an estimate of how much India’s economy will grow in the current financial year, 2022-23. The First Advance Estimate, as it is known, pegged economic growth at 7% over the previous year. This was a cause for some celebration among the mainstream media and government circles. It would also, perhaps, imbue a much- needed positive spin to the Union Budget for 2023-24, to be tabled in Parliament on February 1.

The advance estimates are approximations and usually tend to get corrected as time passes. They also contain estimated details about components that make up the gross domestic product (GDP), such as how much spending have private entities (households and business) and the governments (Central and states) done. This fine print is ignored by and large, with the headline numbers of GDP growth dominating the attention. But it is in these numbers that one finds the rather dire picture of the Indian economy. Let us look at these numbers.

According to government estimates, private final consumption expenditure (PFCE) – that is, the sum of all spending done by households and other private entities – is pegged at 57.2% of GDP in 2022-23. Last year, in 2021-22 it was 56.9% of GDP. So that’s a positive sign because people’s spending is what drives the economy. However, there is a rub.

Going yet another year back, in 2020-21, PFCE was 57.3% of GDP, as per fresh revised estimates. So, private spending dipped in 2021-22 and has risen a bit in the current year, but it is still below the level reached in the first pandemic year. (See first graph in figure below)

Household spending is estimated at 57.2% of GDP in the current year, just below the first pandemic year of 2020-21. This is a shocking situation because it means that despite all the talk of recovery from the so-called pandemic induced economic slowdown, people do not have sufficient buying power in their hands to create the necessary demand in the economy which, in turn, would lead to more investment, more production, more jobs and thus an overall recovery. Remember: this is the situation when the economy is supposed to be doing well with a growth rate of 7% predicted.

The second graph in the above graphic is equally worrisome. In conditions like these, the government can step in and increase spending by initiating various welfare programmes among other measures. This would put money in the hands of the people and kickstart the economy. But the graph shows that government spending (officially known as Government Final Consumption Expenditure or GFCE) as a share of GDP has declined steadily over the three years starting with 2020-21. In the current year it is estimated at 10.3% of GDP, a full percentage point below the first pandemic year. This is because, despite all the grand inaugurations of projects and flagging off of sundry trains and river cruises, the Bharatiya Janata Party government has been very miserly in spending money, especially where it matters. It is blinded by the neoliberal dogma that government should not spend much, encouraging private capital to move in to do the spending. These hopes have been belied and yet the government continues in the same mode.

In fact, as pointed out by CMIE (Centre for Monitoring Indian Economy), if PFCE and GFCE are broken down over half year periods (as shown in the chart below) the astounding conclusion is inevitable that private spending is estimated to decline in the second half of this year compared with the second half of last year. Data is from the Reserve Bank of India.

In the second half of 2021-22, PFCE was Rs.45.9 lakh crore while the estimate for the current year’s second half is Rs.45.8 lakh crore, as shown above. What these estimates are saying is this: household spending will dip in the second half of the current year, indicating a worsening situation. Again, remember that this is happening when overall economic growth is being predicted at 7% for the year.

Since the pandemic began in 2020, private consumption spending has barely recovered to reach a ‘high’ of Rs.45.9 lakh crore in second half of last financial year and it is stagnating after that. Meanwhile, government spending has barely inched up in absolute terms and – as we saw earlier – it has actually declined as a share of GDP.

Imports Zoom Up

Imports and exports are other components of GDP calculations. On this count, too, the government is estimating some rather bizarre numbers. According to the First Advance Estimates for 2022-23 (linked earlier), exports are expected to improve from 21.5% of GDP in 2021-22 to 22.7% in the current year. This flies against the fact that most of the world is currently facing an imminent threat of recession. How India can increase its exports in such conditions when the target or importing countries are in a slump, is beyond imagination.

On the other side, imports are pegged to rise substantially, from 26.3% of GDP last year to 29.7% this year. This confirms the burgeoning trade deficit which had reached $111.02 billion for the April-November 2022 period according to the government, up from $47.23 billion in the corresponding period of 2021. In other words, the whole ‘Make in India’ and ‘Atma Nirbhar’ framework appears to have vanished into thin air as increasing imports continue to erode domestic industry.

The government may be celebrating healthy economic growth but an unemployment rate of around 8% in December, reaching near 10% levels in urban areas, low wages and high inflation have ground down the working people to such an extent that they are just unable to sustain sufficient buying power. On top of that, the government is withdrawing supportive policies like the free 5kg foodgrain per person that was wound up in December 2022. It would be foolish to imagine a cause for celebration in such desperate circumstances.