NEW DELHI: Responding to the growing concern over sluggish consumption growth in the economy, Sanjeev Sanyal, member, Economic Advisory Council of the Prime Minister (EAC-PM), said in a high sustained growth economy both consumption and investments can’t rise together.
Sanyal said a sustained high GDP growth is always investment-led and not consumption-led. He explained that if both investment and consumption grow at a high rate, savings would fall, investment-savings gap will widen and the current account will blow up. “So, sustained growth is always about investments outpacing consumption because it means that your savings rate is also increasing,” said Sanyal.
In the recently announced second quarter GDP numbers, though the GDP grew at 7.6% in real terms, private consumption grew at a meager 3% compared to gross fixed capital formation (GFCF) growing at 11% in real terms.
Right now what we are seeing, says Sanyal, is the investment led growth, and it is the only way to have a long cycle of high growth because investment can both generate demand and create the capacity to meet the demand. “Consumption is different, it increases demand but it does not create the capacity to meet the demand,” says Sanyal.
When asked if the economy will be able to sustain high growth in near future, he said the fact the country has been able to generate 7% GDP growth under difficult circumstances suggests that this economy is easily capable of sustaining 8% plus GDP growth rate in a benign external environment.
He also highlighted the fact that India’s economic growth has come without any macroeconomic stress – inflation is not spiking up, the current account is not blowing up or foreign exchange reserves have not declined.
He further says that if the world economy is growing, interest rates are moderate and energy prices are stable, India can easily do 8%-plus growth on a sustainable basis. Sanyal refuted the claims that only urban rich and upper middle class is driving consumption in the country.