MC Analysis: GDP numbers show early signs of investment-led growth with strong multipliers

The headline numbers show that the Indian economy has cantered onto a fast lane

For the sake of analyses, it can be sometimes useful to carve out a country’s national income data into consumption and investment slices. A relevant question to ask would be: which of the two (consumption or investment) has been doing the heavy lifting for the broader economy’s growth?

The latest national income data that the national statistical office has put out on May 31 makes for an interesting reading.

The headline numbers show that the Indian economy has cantered onto a fast lane. Real or inflation-adjusted gross domestic product (GDP) grew 8.2 percent in 2023-24.

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The noteworthy piece of statistic, however, is that much of this growth over the last 12 months appears to have been investment-led. Gross fixed capital formation (GFCF), a mainstream proxy to measure economy-wide investment activity, grew 8.2 percent on an inflation-adjusted constant prices basis in 2023-24 compared to 6.2 percent growth in 2022-23. At the aggregate level, GFCF accounted for more than a third—33.5 percent—of the total GDP (in constant prices) in 2023-24. Directionally, it is higher, albeit marginally, from 33.3 percent of GDP that GFCF accounted for in 2022-23.

If GFCF were to expand at high single digits in the coming years, it could mark a significant pivot in the structure of India’s GDP—from being heavily consumption dependent to being investment-driven.

For too long, the Indian economy has been characterised by reliance on consumption expenditure. Household spending has been the strongest edifice of India’s economic story over the last few decades, partly driven by a swelling middle class whose spending ability and appetite and the resultant demand for goods and services have served as the primary growth machine.

Economies react to consumption-led levers with a greater immediacy. When families spend more on goods and services, companies add capacity lines to meet extra demand. Most of this demand-led growth is a function of people’s income levels, not just of their current income levels, but also of what they think of their future incomes. For instance, the key determinant of a household to buy a car or a house is not its current income levels, but what it thinks about its ability to finance the car or house purchase over several years since most of these are bought on loans. To that extent, consumption-led growth is more prone to income volatility risks, something which India and the rest of the world experienced during the Covid-19 pandemic or in the aftermath of the financial market crash of 2008.

Investment-led growth, on the other hand, is a slow-moving variable. Such growth is qualitatively different and offers more solidity to the macro-economy to withstand exogenous policy and event shocks.

The national income data show that the construction sector grew 9.9 percent (in constant prices) in 2023. This stands out more so because this has come on the back of a very high base of 9.4 percent growth in the previous year, perhaps mirroring the high pace of infrastructure project execution such as roads, highways, ports and airports.

To be sure, the government has been emphatically focused on the investment-led growth model. In the Interim Budget for 2024-25, which was presented on February 1, Finance Minister Nirmala Sitharaman pencilled in a capital expenditure of Rs 11.1 lakh crore, a growth of 11.1 percent over 2023-24.

The focus on capital expenditure relies on the principle that higher public investment in infrastructure projects unleashes economic growth through multipliers.

This has grown on the back of a 33 percent—from Rs 7.5 lakh crore in 2022-23 to Rs 10 lakh crore in 2023-24.

Highways and ports are long gestation projects, but can create jobs, with cascading benefits on intermediate industries such as cement and steel. The government’s decision to do the heavy lifting on capital expenditure appears to be a part of the well-crafted medium-term strategy to not just accelerate the pace of infrastructure project execution, but also to trigger a cycle of private sector investment, or what economists sometimes describe as the “crowding in” phenomenon.

The GFCF growth in the national income data seem to suggest that there could be early signs of this trigger kicking-in.