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Consumption may boost short-term demand, but investment-driven growth is key for long-term economic progress, as evidenced by the differing experiences of India and China. 

The Dual Drivers of Economic Growth

Economic growth depends on two interconnected forces: supply (production of goods/services) and demand (expenditure to purchase them).

For an economy to grow, supply and demand must grow in couple. If demand outpaces supply, inflation increases. If demand lags, businesses face unsold inventories, which lead to production cuts, job losses, and a downward wave in growth.

The Four Pillars of Demand

• Private Consumption: Spending by individuals on essentials (food, clothing) and discretionary goods (phones, vacations).
• Private Investment: Spending by firms/households on machinery, factories, or homes.
• Government Expenditure: Spending on public services (salaries for teachers, infrastructure) and investments (roads, healthcare).
• Net Exports: Exports minus imports (trade balance).
  

Why Investment Outshines Consumption?

Investment drives growth more powerfully due to its multiplier effect. For example, a ₹100 investment in a highway project not only creates jobs but also boosts incomes for workers and firms, spurring further demand.

• The highway may later enable new businesses (shops, factories), amplifying GDP growth beyond the initial ₹100.
• The multiplier’s strength depends on the investment’s nature (e.g., infrastructure in underdeveloped areas yields higher returns).

Consumption has a weaker multiplier. While higher incomes boost spending, consumption alone struggles to lift overall incomes or productivity. Keynesian economists label consumption a "passive" demand driver—it follows growth but rarely leads it.

China v/s India: Growth Models

China’s Investment-Led Boom: Since the 1970s, China prioritized high investment rates (44.5% of GDP in 2013), funding infrastructure, manufacturing, and tech. By 2023, its per capita income was five times India’s (or 2.4 times, adjusting for purchasing power).

India’s Consumption-Driven Stagnation: India’s investment rate lagged (30.8% of GDP in 2023), while consumption dominated (60.3% of GDP). Reliance on consumption slowed growth and widened inequality, as job and income gains remained uneven.

India’s Investment Challenges

• Corporate investment has stagnated since 2012, reflecting low "animal spirits" (business confidence).
• Recent budgets prioritize tax cuts over public investment, signaling a low-growth trajectory reliant on elite consumption.

Role of Government Investment

Public spending on critical sectors (healthcare, renewable energy) can catalyze private sector confidence and spread growth benefits widely. China’s state-led investments in infrastructure and tech exemplify this strategy.

Way Forward

Consumption sustains short-term demand, however, it cannot drive sustained, equitable growth. Investment, with its multiplier effects, remains the engine of growth. Policymakers should prioritize public/private investment in transformative sectors to avoid stagnation and inequality.

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Source:

THE HINDU

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