Context:
This analysis juxtaposes the growth paths of India and China while underscoring investment as one of the most promising drivers of economic growth.
Economic Growth in a Supply Demand Balance Understanding
- On the other hand, GDP stands for the value added by the production of goods and services and aggregate demand makes sure that all these goods and services are bought.
- Inflation (in excess of demand) or an economic slowdown would result from the imbalance in supply and demand.
Components of Aggregate Demand
- Household Private Consumption Willingness of individuals to pay for certain goods/services.
- Private Investment Expenses incurred by firms and households for capital goods.
- Government expenditure on behalf of citizens for their public services and infrastructure.
- Net Exports (Exports Imports) Contribution through International trade.
Investment: the Multiplier Resource
- Investment is a strong multiplier for the economy.
- However, a ₹100 investment in infrastructure can generate about ₹125 in GDP through spillover effects (creating jobs, launching businesses, increasing productivity).
- Public investments (highways, railways) that use more multipliers in less developed countries.
- Consumption driven growth have no such high multiplicative factors increase in consumption does not augur well for production and income growth.
India vs. China: Diverging Investment Approaches
- 1990s: India and China had similar per capita incomes (~1.5% of U.S. levels).
- 2023: per capita income in China becomes five times higher than in India because it used investment ratio derived from increasing GDP.
- Investment as a %age of GDP:
- China: 41.3% (2023), peak value of over 44.5% (2013).
- India: 30.8% (2023) from 2012.
- Heavy post 2008 state led investment in China was directed toward building infrastructure, artificial intelligence, renewable energy, and manufacturing.
- Growth in India is consumption driven (~60.3% of GDP in 2023) with lower investment and is running a trade deficit.
The Challenges with Over India Growth Model
- Models based on consumption as a driver for growth are slow and fallacious in nature these are more effective at reaching out to the middle and upper classes.
- Private sector defers investment due to low confidence. “Animal spirits” are quite subdued.
- Neither has the government stepped in with adequate public investment necessitating stimulus.
Public investment should step up to give confidence to the private sector.
Increase spending in critical areas such as infrastructure, green energy, and advanced manufacturing.
Lower dependence on consumption led growth to avert inequalities.
