Economy

IAS Parliament 6 years

KEY POINTS

Consumption-led growth

· It relies on higher consumer spending to raise aggregate demand and lead to higher investment and faster economic growth.

Investment-led growth

· It in contrast, relies on investment to create new capacity.

· This, in turn, creates more employment and hence higher demand, while simultaneously, increasing productive capacity.

· As supply rises in tandem with higher demand, growth picks up.

In recent years, India’s GDP growth continues to be powered by consumption, not investments.

Is Consumption led growth sustainable?

· Consumption led growth is sustainable up to a point, especially if it is financed by expanding the government (centre plus states’ cumulative fiscal) deficit.

· In the short term, Consumption-led demand could result in an increase in imports (in response to higher demand) and, possibly, a higher current account deficit as well.

· In the long term, demand pressures from rising incomes, in the absence of an adequate supply response, could lead to overheating of the economy and inflation.

· Consumption-led growth can arguably lead to a slackening of future growth if it entails growing imbalances due to limits to capacity creation, and rising debt burdens, particularly for households.

Way ahead

· In India as well as globally, experience has shown that in the long term, economic growth is likely to be higher and more sustained if it is investment-rather than consumption led.