Can the economic growth due to credit based consumption without the increase in investment be sustainable? Discuss keeping India in focus.
Consumption led growth is when the consumption increases, which leads to higher demand in the economy while Investment led growth is when private investment is increased, it leads to capacity expansion in the economy and hence output is increased.
Economic growth in India is based on consumption rather than investment as in countries like China.
This growth is not sustainable because:
a)Consumption-led growth relies on higher consumer spending — via the Seventh Pay Commission and one rank, one pension payout, for instance — to raise aggregate demand and lead to higher investment and faster economic growth.
b)Without investment in economy, its production capacity cannot be raised.
c))Job creation which is important to reap the benefit of demographic dividend is possible only with private investment. Creation of 10 million jobs every year would not be possible without requisite investment.
d)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.
e)In the long term, it could also lead to inflation, unless there is sufficient spare capacity in sectors
f) When economic recovery begins, demand pressures from rising incomes and the sudden release of pent-up demand could, in the absence of an adequate supply response, lead to overheating of the economy and inflation.
Resolving twin balance sheet problem is required to boost private investment.
For a country like India with high proportion of population in the working age, investment led growth is required to unleash the benefits of demographic dividend.
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