IMF’s take on India’s economic growth should trigger rethink on consumption-driven model

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(Sanghnomics is a weekly column that tracks down and demystifies the economic world view of Rashtriya Swayamsevak Sangh (RSS) and organisations inspired by its ideology.)

International Monetary Fund’s First Deputy Managing Director Gita Gopinath recently said in an interview that she is hopeful of India becoming the third-largest economy by 2027. She has pegged this growth to be closely linked to the growth in especially rural consumption. Private consumption in India, especially in the rural sector, is on a recovery path, according to her.

These remarks came after the IMF increased India’s growth projection for the financial year 2024-25 to 7 percent in its ‘World Economic Outlook’ report. This revised growth projection is an outcome of new data for Fast Moving Consumer Goods (FMCG) and two-wheeler sales and a favourable monsoon. Interestingly, the Union government in its economic survey has projected a growth rate of 6.5 per cent but the IMF projections are even more bullish.

While this does send a positive signal about the state of affairs in the Indian economy, it also raises a serious concern. We as a society are blindly following the consumption-driven Western economic model.   And what would be the impact of the consumption-driven economic models on our society and environment at large?

Restraint, the Indian way

India’s indigenous economic models have always emphasized on restrained consumption. However, the Western economic models, especially those following the Keynesian school of thought have led to reckless consumption. A major environmental crisis in the form of ‘Climate Change’ that is having a devastating effect on communities and habitats causing huge disruptions at the socio-cultural level is no more merely an academic concern. It is staring us in the face.

Mohan Bhagwat, the Sarsanghchalak of Rashtriya Swayamsevak Sangh (RSS) aptly points out the fallacies of the consumption-driven economic models in his foreword to a recently published collection of essays on self-reliant India titled “Aatmanirbhar-A Swadeshi Paradigm’ .

Bhagwat says, “The prevalent Western discourse regarding the progress of humanity relies on a materialistic, fragmentary and consumerist approach to everything that exists. Following this discourse, naturally, happiness is sought from various objects in the world which are scarce. The desires of human beings are unlimited and according to Western discourse, the only way of satisfying those desires is through increased consumption. However, the very satisfaction of desires fuels them to increase further like the offering of ghee in fire. Therefore, there will be no end to these desires.”

In such a case there has to be a competition to gain control over consumables in which only the fittest will naturally survive. The unfit either perish, or live at the volatile mercy of the fit who dictate over them. The system of conduct of economy and development prevalent today in which various experiments have been done in the last 200 years, held forth on happiness and peace but ultimately and unquestionably failed.

Consumption-driven model is unsustainable

According to Bhagwat, this system has no solution or succour to guide the stumbling human society to a brighter, peaceful and prosperous future. Despite huge progress in science and technology, humanity is now riddled with various rifts and clashes; destruction of families; psychological disorders, psychosomatic disorders; and irreversible damages to the environment, ecology and stratosphere on which human life depends. The situation is rather alarming.

Not only morally and ethically, but even technically there are serious doubts over the sustainability of consumption-driven growth models.

Nilanjan Ghosh and Arya Roy Bardhan argued recently in an essay titled ‘Is consumption-led growth waning?’. “As such, Indian macroeconomy needs to possess a diversity of growth drivers, and cannot rely on private consumption as its lone long-term growth enabler. Consumption-driven growth is not going to be sustained over time, since rising incomes will spur savings, and reduce consumption share of the GDP. The World Inequality Database reveals that while India's income inequality has plateaued over the last five years, wealth disparity has surged, with the top 1 percent creating more assets out of their incremental income. This implies that the lower- and middle-income groups are more likely to spend additional income, fuelling economic growth through the consumption channel, unlike their wealthier counterparts.”

“While the “rich getting richer” undermines the aim of short-term consumption-led growth, consumption as a growth driver tends to peter out in a mature economy, and eventually takes a back-seat once per capita income reaches higher levels. This has been the case with China, Japan, South Korea, and also the EU”, added Ghosh and Roy.

The Modi government seems to have realised this and hence there has been a focus on increasing capital expenditure in the budget. There does appear to be an attempt to decouple India’s growth from private consumption.  This would pay India dividends in the long run. It is important to strengthen such initiatives and not get overwhelmed by the consumption driven economic growth. That might pay rich dividends in the short run but as the past experience shows, it isn’t sustainable in the long run.

Earlier Sanghnomics columns can be read here.