Economic growth is like sailing on two boats:
Supply side (production of goods and services).
Demand side (expenditure for purchasing goods and services).
GDP (Gross Domestic Product) measures the value added through production.
Balanced growth is essential:
If supply lags demand → Inflation.
If demand falls behind → Unsold inventories, reduced production, job losses, and economic slowdown.
Components of Aggregate Demand
Private Consumption – Expenditure by individuals on goods like food, clothing, and electronics.
Private Investment – Spending by firms and households on machinery, factories, and residences.
Government Expenditure – Includes both consumption (e.g., salaries of government employees) and investment.
Net Exports – Exports minus imports in international trade.
Investment and Multiplier Effects
Investment has a strong multiplier effect:
A ₹100 investment can increase GDP by more than ₹100 (e.g., ₹125 with a multiplier of 1.25).
Example: Investment in highways not only benefits workers but also stimulates new businesses.
The multiplier effect is stronger in underdeveloped areas than in developed ones.
Consumption has a weaker multiplier effect:
Income increases lead to higher consumption, but consumption alone does not significantly boost incomes.
Keynesian economists consider consumption a passive component of aggregate demand.
India vs. China: Growth and Investment Trends
In the early 1990s, India and China had nearly equal per capita incomes.
By 2023, China's per capita income was 5 times India's level (2.4 times after adjusting for purchasing power).
Investment-led growth in China:
Higher investment rates since the 1970s.
In 1992:
China’s investment rate = 39.1% of GDP
India’s investment rate = 27.4% of GDP
In 2023:
China = 41.3%
India = 30.8%
India’s consumption-led growth:
Consumption as a share of GDP (2023):
India = 60.3%
China = 39.1%
India has weaker investment and government expenditure, along with a trade deficit.
Challenges in India's Investment Growth
Economic growth based on consumption is slower than investment-driven growth.
It also increases inequality – many Indians experience slow growth in jobs, income, and consumption.
Stagnation in investment:
Public and private corporate investment has slowed.
Household investment (e.g., in real estate) showed some strength in the early 2010s.
Private capitalists are reluctant to invest due to weak confidence ("sagging animal spirits").
Need for government intervention:
Government investment is crucial to restore confidence in the private sector and spread economic benefits.
However, recent Union Budgets have focused on tax concessions rather than boosting investment.
Preference for a low-growth trajectory led by middle and upper-class consumption.
COMMENTS