Components of Consumption

The Final Consumption has two components viz.
1. The Private final consumption expenditure &
2. The Government final consumption expenditure.
Since, there has been an increasing trend in gross domestic savings as a proportion of GDP, the Economic Survey 2010-11 also notes a pick up in the Private Consumption.
  • The Survey notes that a rise in savings and investments and pick up in private consumption has resulted in 9.7% growth of GDP at market prices (constant) in 2010-11. However, the Survey notes that Government final consumption expenditure is decelerating sharply in the fiscal year 2010-11. This is evident from the following snippet generated from the Economic Survey:

The Question arises is : Why the Government Consumption is decelerating from a 16.4% in 2009-10 to 2.6% in 2010-11 ?
The Economic Survey observes that the reduction in the Government Consumption is largely due to the Base Effect. To understand this we need to know two things.

  1. What is Government Consumption?
  2. What is Base Effect ?

Government Consumption includes all government current expenditures for purchases of goods and services (including compensation of employees).

  • It includes most expenditure on national defence and security, but excludes government military expenditures that are part of government capital formation.

The Base effect refers to the tendency of a small change from a low initial amount to the current amount which is translated into a large percentage and appears as large. To understand this we take a simple example:
We assume that government consumes Rs. 100 in 2001 and in the following years, the consumption shows the following trends

In this example, we note that though as compared to the Year 2001, the growth is still negative. But it appears that the growth in 2006 has jumped to 25%. This is called Base Effect. The Base effect is generally used in terms of inflation but is used almost in all important economic indicators.
The Government Consumption in 2010-11 is expected to be 2.6% largely due to the base effect.

List of Topics : Economic Survey 2010-11

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