Economic Highlights

New Delhi, 6 March 2010

Govt’s Double-talk

HOW & WHOSE GDP IS RISING?

By Shivaji Sarkar

It is a classic case of double-talk by the government. The chief ministers were assured of strengthening the Public Distribution System (PDS) to keep a check on prices. Instead, it has now slashed the spending on it by 25 per cent. The budget estimated a higher GDP growth, but it is not reflected in per capita income and consumption pattern, which has come down sharply.

It is a moot question as to how or whose GDP is rising. A natural corollary to the GDP growth should have been seen in increased incomes of individuals. This has not happened. On the contrary the per capita income measured in terms of the GDP at constant prices has declined from 8.1 per cent in 2007-08 to 3.7 per cent in 2008-09 and expected to touch 5.4 per cent in 2009-10, partially owing to pay-revision of government employees.

Contribution of private consumption to GDP has come down to 36 per cent in the current year from a high of 78.2 per cent in 2008-09, and 51 to 58 per cent during the preceding three years. This should ring alarm bells as contribution of government spending to GDP has been constant at 10 to 11 per cent during the past seven years.

People’s capacity to spend has taken a terrible hit. Private consumption as per government estimates continues to decline from 8.3 per cent in 2007-08 to 5.4 per cent in 2008-09 and a dismal 2.7 per cent in 2009-10. The expenses have gone below even the 2006-07 level of 3.8 per cent.

It simply means people are unable to spend more as commodities and minor luxuries are going beyond their means. Last year people spent almost nothing on clothing and footwear and spiraling prices drastically brought down their expenses on food, beverages, and tobacco.

Spending on clothing and footwear was almost nil at minus 0.6 per cent in 2008-09. It was a high of 24 per cent in 2005-06, 23 per cent the next year, came down to 8 per cent in 2007-08. The trend coincides with the inflationary figures and rising loss of jobs. No wonder this must be reflecting on the turnover and profits of these two industries, which symbolize growth. The two industries employ, both direct and indirect, the highest number of people with an average of 8 per cent share. As inflation gallops the health of these two industries may further get affected.

That people have less capacity to spend is also testified by fewer expenses on recreation, education and cultural services. They have spent only 5 per cent of their income in 2008-09 against 7 to 13.2 per cent in the preceding years. Obviously, the people are constricted on spending on minor luxuries, if it can be called so, not only because they have to shell out more for food but also for commuting. Expenses on the latter have increased to 12.3 per cent now from 5 per cent in 2005-06. This signifies that transport fare has been increasing primarily because of higher fuel prices.

Another area that has taken a hit is furniture and furnishings. Expenditure on furnishings is characterised as an improvement in lifestyle pattern. However, this has apparently been affected with private expenditure on it coming down from 15.9 per cent in 2006-07, to 14.6 per cent the next year to a mere 3.7 per cent in 2008-09. It signifies that the middle class, who is supposed to be the engine of growth, is lacking in capacity.

The expenditure on medical care and health services has suddenly increased in 2008-09 to 8.1 per cent from 2.5 to 5.8 per cent in the preceding years. The figure coincides with higher job losses and consequent possibility of less capacity to afford for nutritional food on the one hand and higher physician’s fee and medicine costs on the other. The share of expenditure on food items has been gradually declining over the years. It was 35 per cent in 2008-09 as against 39.6 per cent in 2004-05.

Indeed, this raises a fundamental question-- whether the government is justified in deciding to spend 25 per cent less on monitoring of food, civil supplies and PDS. Besides, it exemplifies that the government has a far less political will to tackle the serious food inflationary situation, which is hovering between 17 and 20 per cent.

While the government allocated Rs 7.2 crore in 2009-10 for the Ministry of Consumer Affairs, it spent only Rs 2.83 crore suggesting it had not taken much initiative to ensure that the commodity prices remained under check. Overall, for monitoring and research in food grains, management and PDS the allocation was Rs 40.40 crore, whereas the expenditure was a mere Rs 14.6 crore.

For the year 2010-11, the allocation has been slashed to Rs 29.69 crore under these heads. This is surprising particularly in view of the importance laid by the government on strengthening of the PDS. Additionally, no one in the government is denying that the price situation would worsen in the days to come.

This is alarming as the Economic Affairs Department of the Union government virtually contradicts the growth projection made in the budget. The department says that there are no major changes in the overall growth rate of GDP at constant 2004-05 prices, except in 2007-08, where it has been revised to 9.2 per cent from 9 per cent. Interestingly, this is a sober way of saying that in real terms the GDP is not growing.

The department has also expressed concern over the decline of share in agriculture to 15.9 per cent from 17.4 per cent and manufacturing to 9.9 per cent from 10.9 per cent. In short, other than presenting a contradiction it also smacks of a grim economic scenario.

The budget is an indicator of the government’s unwillingness to empower the private consumer. The imposition of service tax on goods transport – road, rail and air – would only make life difficult. Truckers have jacked up rentals by 6 to 8 per cent owing to higher diesel prices and the service tax on goods. Railways and air bookings too would be expensive by 10 per cent. Simplified, it would further cut down private expenditure and hit growth prospects. ---INFA

(Copyright, India News and Feature Alliance)