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The Govt Can't Keep Driving GDP Growth

Mar 7, 2017

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On March 1, 2017, I wrote a piece titled, Believe in Indian GDP Growth at Your Own Peril. I got many responses to the piece. Some readers, as always, accused me of being a Congressi To them I suggest please read my writing before May 2014. Also, life is not binary at the end of the day. There is a little more to it than just that.

Some others asked if I was suggesting that the government is fudging the Gross Domestic Product(GDP) data. Not at all. I have no evidence of the same. All I was saying was that there are multiple data points which show that the Indian GDP growth just did not feel right and pass the basic smell test.

During the course of last one week, the chief statistician of India, TCA Anant, has given several interviews to explain the deficiencies in the way the Indian GDP is measured. And these deficiencies I feel have led to the GDP being overreported. (I suggest that readers looking for greater detail Google up and read Anant's interviews).

In fact, there is another point that needs to be made here. One way of measuring the GDP is through the expenditure method. This involves the summing up of private consumption expenditure, government consumption expenditure, investments and finally net exports (i.e. imports minus exports).

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Now what happens if we subtract the government expenditure from the GDP number measured through the expenditure method. How much does the remaining GDP grow by? Look at Figure 1.

Figure 1

As per Figure 1, the GDP growth without taking the government expenditure into account during the period October to December 2016 was 5.6 per cent. This was 140 basis points lower than the overall GDP growth of 7 per cent. Why has this happened?

Take a look at Figure 2. It makes for a very interesting reading. It essentially shows what portion of the increase in GDP between years comes from an increase in government expenditure.

Figure 2

What does Figure 2 tell us? From forming next to nothing as a part of the increase in GDP between the years, for the period October to December 2016, an increase in government expenditure made up for 26.64 per cent of the increase in GDP.

Hence, for every Rs 100 increase in GDP, increase in government expenditure made up for Rs 26.64 on an average. As we can see during the course of this financial year, an increase in government expenditure has been responsible for a greater proportion of the increase in GDP.

The government spending more to get an economy out of trouble is standard operating procedure. They need to be seen to be doing something and this all they can do.

Nevertheless, there are problems with this approach. The trouble is that this way of creating economic growth by the government spending its way out of trouble, cannot continue indefinitely. At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for. Also, the multiplier effect of private expenditure is better.

If India has to continue growing at greater than 7 per cent, then investment needs to pick up and that doesn't seem to be happening currently due to various reasons. Given that I keep discussing these reasons, I will give them a skip here.

Take a look at Figure 3. It shows the portion of the GDP formed by gross fixed capital formation, a measurement of investment.

Figure 3

The gross fixed capital formation as a percentage of GDP has been falling over the last few years. This figure needs to start going up, if a genuine economic recovery which creates both jobs and prosperity, needs to take place. And increased government expenditure cannot do anything about this.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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12 Responses to "The Govt Can't Keep Driving GDP Growth"

Anurag

May 21, 2017

The real truth behind fancy figures . Thank you very much sir for pointing out critical points mostly shrouded by media and experts .

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K.S.Sashikumar

Mar 8, 2017

Dear MR.Vivek
Please note that the GDP has been shrinking not only in India but in all major economies after the 2008 financial crisis. The secular growth that the world experienced prior to the 2008 crisis was largely due to excess liquidity and debt driven. Alan Greenspan"s economic model met its waterloo in 2008. Since then Governments all over the world are struggling to spur economic growth by increasing the spending. The earlier model of liquidity driven economics have helped only the rich, powerful and the cronies. A reversion is taking place now which can be seen from Brexit and trump's victory. why single out India? At least this government seems to have good intentions and are bent on repairing the old and dilapidated house that it had inherited. I have never seen you appreciating the good things that this Government has done. There seems to be so much of negativity, bias and pessimism in your columns.

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Yudhvir Talwar

Mar 8, 2017

9015167066 There are numerous instances which one come across every day suggesting that informal economy is still not picking up. Recently when I wished to get some dents removed from my car and get it part payment I paid 50% less than what I would have paid in normal times. People are spending much less and informal sector earnings have not achieved normalcy. I do have a feeling that CSO numbers are to please political masters.

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Dr. Anoop Tankha

Mar 7, 2017

The ruling political party governs Nation in democracy. Who gives it mandate to take absurd decisions and put the future of citizens in jeopardy? Law abiding citizens pay tax for earning, spending, saving and now even for drawing their own money from bank. How does the ruling party uses this money collected through taxes is unchecked. The money wasted by them is later on covered up by various doctored statistics which majority do not understand. Thus the concept of democracy and welfare state is at stake. Corruption in elections is well known added with caste and religion manipulated voting pattern of our voters. The only hope is the army of unemployed youth which shall produce a savior of our country.

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P JOHN SAMUEL

Mar 7, 2017

I understand Vivek Kaul analyses because I myself was a bureaucrat for many years and I understand Govt spending both plan spending and non plan spending. Most often we never got the desired results despite spending the money. All we need is good infrastructure investment but unfortunately we limit all our activities to IT sector which is more a service oriented activity rather than production activity. I only hope that good sense will prevail as the days go by and perhaps this country of mine will become a paradise one day.

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DILIP KUMAR PURWAR

Mar 7, 2017

Finally you agreed that you are dealing the matter with congressi chasma.I disagree with your approach & analysis.I have never seen in this country discussing so much on GDP/intolerance/notebandi.Note bandi was such a historic,tough & unpopular step.But good for country & common man.No body was expecting such a harsh action from a poltician in democratic country,where polticians buy vote by offering TV/Computer/atta ,daal,kerosene,food subsidy to small number of atual poors but to favor large number of agents/broker to used to fudge ration card,gas connection,kerosene/diesel/fertilizer subsidy.Fudging MENREGA scheme with large number of benami account.Congress made india a total corrupt society ,hence corruption was so rampant at high places. Mr.Modi has rightly said it is not Haward but hard work will win at the end of the day.We have never had PM worst than M M Singh in the history of India.He sacrificed his honesty & his worthiness just to continue to plum post of PM.This Govt has never denied that notebandi has not affected economic activity, but acknowledged that we choosen such time( after diwali) so have minimum affect.The have not doled out freebies to buyy vote.Modi has taken very sound steps for stronger finance of the country.Your graph itself showing that spending risen sharply wrt old goverment but with no significant increase in budget deficit.Inflation is low @5.5 to 6.5% against double digit inflation10-12%.If inflation is low so % growth of sale will also be low ,but differential growth will be much stronger.It is as simple if inflation is 5-6% & deposit rate 7/7.5%,I am better off than interest of 8/8.5% against inflation of 8-10% of previous regime.This sudden jump in one time goverment expenditure due to central govt pay revision,army OROP etc.One side you advocate private investment & other hand you will cry for bank NPA.What is the use of gross fixed capital formation when most of it are bad assets.With UPA minister directing bank officials to give loan to undeserving enterprenure. The past UPA goverment taking credit of introducing Aadhar,GST,etc but only lip service.There is so much opposition of Aadhar linkage which was never implimented by UPA but Modi is now firmly implimenting & now Goverment is able to stop subsidy leakage and several thousand of crore is being saved.Goverment have money & now moderernizing defense/railway etc.in big way
UPA GDP was never closer to china.But now we are par or going to beat china.we are top moving economy in the world despite global slowdown.I am pretty confident that present goverment is doing wonderful job for betterment of country.They are doing very hard work to bring back glory to nation.3 yrs are not a long time ,I think they are on right course."ABHI TAK IS DESH MEIN DALAL SARKAR CHALATE THE,AB DESH BHAKAT CHALA RAHA HAITO DALALO KA CHILLANA UNKI MAJBURI HAI".Jai hind

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KRISHANU GHOSH

Mar 7, 2017

HI Vivek,

May I know the reason of removing Government expenditure here. That is the way the GDP calculated as per definition across the world. So do you think that the money spent by government has not converted to product

Please explain with statistical data.

Thanks

KRishanu

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ashoksinghania

Mar 7, 2017

thats the reseaon gdp is not showing significant fall due to notebandi. that is what they have done by setepping up expenditure by 25%in ntfirst half or frontloading the expenditure is root of currents gdp figure
you are wrong at one point. govtexpenditure is net new money added to private sector which in turn has multiplier effect on private sector but after the lag. as govt money or expenditure is debt free for private sector it has better multiplier effect than private sector which borrows and spend.

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Alex D' Mello

Mar 7, 2017

Thank you for enlightening us on GDP issue regularly, we appreciate your straight forward presentation of the facts. Those you accuse you of Congressi follower doesn't understand the real crux of the problem. They brand people either as Congressi or Paki as if India belongs to their family. The People who who govern this country are far more worse than earlier regimes because earlier nobody was branded as anti national, now those who criticize the policies of the govt they are called anti natinals and for women it's worst, threatened with rape. We have become a nation of uncivilised morons.

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B. B. JAIN

Mar 7, 2017

IT WAS VERY INTERESTING TO READ VIVEK KAUL'S COMMENTARY ON THE GOVT'S GDP FIGURES AND CSO'S INTERVIEWS ON THE ISSUE OF MEASUREMENT & CALCULATIONS OF GDP NUMBERS AND UNDERLYING FALLACIES. TRUE, REALITY CAN BE UNDERSTOOD ON THE STRENGTH OF REAL CAPITAL FORMATION IN THE COUNTRY WHICH ALWAYS DEPENDENT UPON INVESTMENT MADE BY PRIVATE SECTOR AS TRULY ANALYSED BY VIVEK KAUL. THREE CHEERS.

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