Monday, July 6, 2009

Composition of aggregate demand in India

Interesting trends in aggregate demand from the Economic Survey 2008-09

1. The slowdown has taken a massive hit on the private consumption whose contribution to GDP growth halved from 53.8% of GDP in 2007-08 to 27% in 2008-09, while that of government has shot four fold from 8% to 32.5% in the same period.

There is another disconcerting longer term trend here, as the share of private consumption has been continuously falling from a healthy 63.7% in 2002-03 to 55.5% in 2008-09. On the positive side, the share of gross capital formation in the GDP has been on a rising trend, increasing from 27% in 2003-04 to 36.2% in 2007-08, mainly on the back of robust growth in fixed capital formation which has risen from 25% to 34% in the same period.

2. On the savings and investment front, the encouraging trend has been the consistent increase in Gross capital formation (GCF), which rose from 25.2% of the GDP in 2002-03 to 39.1% in 2007-08, thanks mainly to the increase in the rate of investment by the corporate sector.

Household sector formed 65% of the Gross domestic savings at 24.3% of the GDP in 2007-08, whereas private corporate sector formed 23% and public sector 12% of the share. Encouragingly, public sector savings have been on the up, growing from 1.1% to 4.5% in the 2003-04 to 2007-08 period.

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