FOR THE SAKE OF GROWTH

INDIA NEEDS TO GO MUCH BEYOND CHOOSING BETWEEN INVESTMENT AND CONSUMPTION

- KG NARENDRANATH

WHEN UNTAMED, tuberculosis was called “consumption.” The name captured the horror of a disease that seemed to eat away the body, reducing its victims to shadows of themselves. The idea of “consuming” thus acquired a moral taint — wasteful, even sinful — contrasted with the perceived virtue of producing or creating anew.

In economics, however, consumption is novice. It is the very purpose of production, the final measure of economic success. The United States, still the world’s largest economy, rests squarely on this pillar: household spending accounts for nearly 68% of its GDP. That model reflects the privileges of a mature economy with deep capital markets and global dominance.

China offers a contrasting template. Over four decades of breakneck growth, it built a more balanced structure— consumption below 40% of GDP, investment almost as large, and net exports a steady contributor. It is this alternative that appears to have shaped India’s policy imagination over the past decade.

In its first two terms, the government led by Narendra Modi sought to rebalance India’s growth model away from consumption and towards investment. The implicit goal was to lower final consumption expenditure from its long-run level near 70% of GDP and raise gross fixed capital formation from around 31-32% back towards the pre-global-financial-crisis peak of 35% and beyond.