The Hindu Business Line : Will we be pampered?

Economic data over the last four decades show that the government's consumption interests have comprehensively prevailed over that of the citizens'. Budgets and economic policies seem to have worked for the government than for the people. No wonder, the people have taken Kennedy's advice seriously and stopped asking what India could do for them. The government is yet to show that it is a constructive and caring benefactor, says G. Ramachandran.

PRIVATE consumption is the most significant determinant of economic growth in India. Other economic variables such as capital formation and government expenditure are weak determinants of growth or are irrelevant to growth.

If the Finance Minister, Mr Jaswant Singh, is in need of evidence to reinforce his positive attitude towards private consumption and his commitment to augmenting the purchasing power of households, here are the inferential statistical numbers derived from the principal economic variables measured over the period 1990-91 through 2000-01.

The rank correlation between growth in private final consumption expenditure (PFCE) and growth in gross domestic product (GDP) at factor costs is 0.94 with a significance level above 0.002. The chances that Mr Jaswant Singh would go wrong by reaffirming his faith in private consumption to spur GDP growth at factor costs are less than two in thousand.

The rank correlation between growth in PFCE and growth in GDP at market prices is 0.81 with a significance level above 0.01. The chances that Mr Jaswant Singh would go wrong by reaffirming faith in private consumption to spur GDP growth at market prices are less than ten in thousand.

It is difficult to be less sanguine and more sober while evaluating the importance of PFCE. The rank correlation between growth in PFCE and growth in gross national product (GNP) at market prices is 0.88 with a significance level above 0.002.

The chances that India, its Parliament and the Finance Minister would err by reaffirming their faith in private consumption to spur GNP growth at market prices are once again less than two in thousand. The statistical association between PFCE and GDP growth is strikingly strong.

The rank correlation between growth in government final consumption expenditure (GFCE) and growth in GDP at factor costs is 0.22 with a significance level below 0.20. The rank correlation between growth in GFCE and growth in GDP at market prices is 0.12 with a significance level below 0.20. The chances that Parliament would err by betting on government spending to spur GDP growth are more than eight hundred in thousand.

Even if the rank correlation between GFCE growth and GDP growth were 0.44, the chances that Parliament would err by betting on government spending to spur GDP growth would be more than eight hundred in thousand. The statistical association between GFCE and GDP growth is very weak.

The rank correlation between growth in gross capital formation (GCF) and growth in GDP at market prices is 0.59 with a significance level above 0.10. The rank correlation between growth in GCF and growth in GDP at factor costs is 0.30 with a significance level below 0.20. The chances that Parliament would err in reaffirming its faith in capital formation to spur growth are less than hundred in thousand.

There is a less sanguine and more sober evaluation of the impact of GCF. The chances that Parliament would err by betting on GCF are more than eight hundred in thousand. By contrast, the least sanguine and most sober evaluation of the impact of PFCE is that the chances that Parliament would err in reaffirming its faith in private consumption are less than ten in thousand.

The strikingly-strong statistical association between PFCE and GDP growth would disappoint those analysts and policymakers who hold the view that savings, capital formation and government spending are the joint and principal determinants of GDP growth.

The weak statistical association between GFCE and GDP growth raises many uncomfortable questions about the role of government as a supplier of services and about the impact of its expenditure on wages and other inputs in making public investments work for the benefit of the public.

The 2003-04 Budget would be a predictably one-sided ritual if it fails to pay attention to the pivotal role played by PFCE in keeping the economy ticking. The analysis of data pertinent to GDP, PFCE, GFCE and GCF in the post-liberalisation period shows that economic growth can be better pursued with an uncompromising focus on private consumption.

Govt for the people?

It is a material world and our interest in the Union Budget — year after year — is driven by our intense desire to conduct our personal, professional and business lives on advantageous and favourable economic terms. It is a material world and the government's interest in its revenues, sources of revenues and spending is most likely to be driven by its desire to conduct its activities on advantageous and favourable economic terms. There are at least two sets of interests: the government's consumption interests and the citizens' private consumption interests.

Over the last four decades, GFCE in constant prices (1993-94) has grown from 5.82 per cent of GDP measured at market prices to 12.68 per cent. In 1960-61, PFCE was 85.2 per cent of GDP measured at market prices. PFCE was 61.68 per cent of GDP in 2000-01. Relative to the aggregate economy, GFCE has grown annually by 1.96 per cent over the last four decades. But PFCE has declined annually by 0.8 per cent.

In absolute terms, GFCE has grown annually by 6.62 per cent over the last four decades. But PFCE has grown by 3.72 per cent annually.

The economic data over the last four decades show that the government's consumption interests have comprehensively prevailed over the citizens' private consumption interests. Budgets, economic policies and economic administration seem to have worked for the government than for the people. GFCE has grown annually by 6.62 per cent over the last four decades. In the same period, GDP at factor costs grew by 4.49 per cent, GDP at market prices by 4.57 per cent, GNP at market prices by 4.55 per cent, GCF by 5.48 per cent and PFCE by 3.72 per cent.

PFCE growth has been the least. GFCE has expanded the most at 6.62 per cent and by a factor of 1.78. For every unit of growth in PFCE, GFCE has grown by 1.78 units. The rate of expansion of GFCE has outstripped GCF too. For every unit of growth in GCF, GFCE has grown by 1.21 units.

More poignantly, the rate of expansion of GFCE has outstripped GDP growth. For every unit of growth in GDP at factor costs, GFCE has grown by 1.47 units. For every unit of growth in GDP at market prices, GFCE has grown by 1.45 units. For every unit of growth in GNP at market prices, GFCE has grown by 1.45 units.

Kennedy and Kothari

John Fitzgerald Kennedy, the 35th president of the US, asked his people to ask what more they could do for America than ask what America should do for them. The people of India have taken Kennedy's advice quite seriously. They have stopped asking what India could do for them.

The handsome growth of GFCE in India over the last four decades leads to a set of inferences. Private consumption occurs for the benefit of government. People save for the benefit of government. The Indian economy ticks for the benefit of government. Budgets, economic policies and economic administration exist for the benefit of government.

Though every force in the Indian economy works for the benefit of government, revenues to government were about 18 per cent of GDP and spending by government was about 27 per cent of GDP in 2001. The average revenue in 2001 in a sample containing 90 countries was 33 per cent of GDP.

The average spending was 35 per cent. The median revenue was 34 per cent and median spending was 36 per cent. The modal revenue was 40 per cent and modal spending was 27 per cent, less than the modal revenue.

Developed economies with an enviable history of welfare economics and all-pervasive social security have done better.

An analysis of a sample containing 29 countries shows that their average revenue in 2001 was 41.52 per cent of GDP. Their average spending was 40.55 per cent. Their median revenue was 45 per cent and median spending was 42 per cent. Their modal revenue was 46 per cent and modal spending was 40 per cent, less than their modal revenue. Their emphasis on social security and welfare economics has not undermined the generation of fiscal surpluses.

Though every force in the Indian economy works for the benefit of government, the government has yet to show that it is a dominant and constructive beneficiary within the economy.

India is not a welfare state with an enviable history of all-pervasive social security. The government has yet to show that it is a constructive and caring benefactor within the economy. But GFCE has expanded at 6.62 per cent, and GFCE growth is almost irrelevant to GDP growth.

India's GFCE grew by 12.8 per cent annually in the period 1960-65. (Kennedy was in the White House between January 1961 and November 1963.) India fought two wars in this period. Thereafter, annual GFCE growth declined to 4.91 per cent between 1965 and 1995. However, annual GFCE growth rose to 9.31 per cent between 1995 and 2001.

But PFCE grew by merely 4.89 per cent between 1995 and 2001, almost 48 per cent less than GFCE growth. Government's consumption interests have overwhelmed the economy's and the citizens' economic interests. Liberalisation and globalisation — the twin targets for criticism by centrist and left-of-centre economists — have had a very favourable impact on consumption by government.

The depressing economic data pertinent to GFCE, GDP, PFCE and GFC have had a strong impact on business strategists who are deeply convinced that the Indian economy can stun the world by becoming a stronger and more caring economy.

Professor S. P. Kothari of the Sloan School of Management, Massachusetts Institute of Technology, is among the optimistic business strategists. He suggests that India should turn Kennedy's preaching on its head and ask what the Indian Government would do for its people.

(The author is a financial analyst. Feedback may be sent to indiagrow@sify.com)

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