Annexure-V- Cover Page for Academic Tasks

Course Code: ECO531 Course Title: Managerial Economics

Course Instructor: Dr. Pooja Kansra

Academic Task No.: 3 Academic Task Title: Assignment

Date of Allotment: Date of submission: 31st March 2020

Student’s Roll no: RQ1958A47 Student’s Reg. no: 11915092

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 Role of Consumption in economic growth of
India

Introduction

Consumption is the value of goods and services bought by

people. Individual buying acts are aggregated over time and
space.
Consumption is normally the largest GDP component. Many
persons judge the economic performance of their country mainly
in terms of consumption level and dynamics.

Composition
First, consumption may be divided according to the durability of
the purchased objects. In this vein, a broad classification
separates durable goods (as cars and television sets) from non-
durable goods (as food) and from services (as restaurant
expenditure). These three categories often show different paths
of growth.
Second, consumption is divided according to the needs it
satisfies. A commonly used classification identifies ten chapters
of expenditure:
1. Food
2. Clothing and foot wear
3. Housing
4. Heating and energy
5. Health
6. Transport
7. House furniture and appliances
8. Communication
9. Culture and schooling
10. Entertainment
People in different position in respect to income have
systematically different structures of consumption. The rich
spend more for each chapter in absolute terms, but they spend a
lower percentage in income for food and other basic needs. The
percentage values of an aggregation over all the households in a
country can thus be used for judging income distribution and the
development level of the society.
The rich have both higher levels of consumption and savings. In
differentiated product markets, the rich can usually buy better
goods than the poor. This happens also because they tend to use
different decision making rules. In certain conditions, the poor
can pay more than the rich to satisfy the same need. In other
words, consumption depends on social groups and their
behaviours, as well as their proneness to advertising.
Third, one should distinguish "consumption" as use of goods
and services from "consumption expenditure" as buying acts.
For durable goods this difference is very relevant, since they are
used for long time periods.
In this vein, the rich have a much wider cumulative bundle of
durable goods purchased over time, so they enjoy a very
significantly higher degree of need satisfaction, whereas the
poor can suffer deficiencies even in the most basic goods.
Conversely, purchased non-durable goods that are not consumed
before the deadline are a typical waste (and squander).
Fourth, only newly produced goods enter into the definition of
consumption, wheareas the purchase of, say, an old house is not
considered consumption in macroeconomics, since it was
already counted in the GDP of the year in which it was built.
Needless to say, for the consumer, both old and new goods
provides some need satisfaction.
In microeconomic terms, total consumption expenditure of one
household is the sum, over a span of time and across all
categories, of the value (i.e. price times quantity) of all varieties
of goods and services purchased, where the quantity purchased
depends on the consumption average dose times the number of
consumption occasions (i.e. seized consumption opportunities).
Macroeconomic consumption is the sum of the consumption of
all households, keeping into account that households are not
independent from each other but rather communicate and co-
variate.
Conversely, consumption is the value of domestic and foreign
firms' sales in the domestic market to households (thus
excluding business investment and public expenditure).

Sequencing

Background of role of consumption in our economy

June quarter of the Q1 economic growth was projected and it

was estimated at 8.2%.
The GDP growth for the first quarter of this financial year was
estimated to be 8.2 % and this forms the background for
consumption driven GDP growth in the economy.
We will analyse the consumption driven GDP growth in this
background and when the economy projected a growth rate of
8.2 % it fueled the question what kind of growth it is?

So in the report we will be analyzing this aspect but but before

we move to the topic I would like to give clarity regarding
certain economic terms the first term-

 GDP-

Gross domestic product is the monetary value of all the final

goods and services produced in a domestic territory of a country
during a financial year.
So 4 conditions should be met-
Firstly the monetary value taken into account ,secondly only the
final goods and services not intermediate goods and services and
thirdly the production must have been taken place in the
domestic territory of the economy and fourthly it should be
within a period of time that one financial year.

 Financial Year-

Financial year also known as a fiscal year or an accounting year

and in India financial year begins on 1st April and ends on 31st
March so it is different from normal year from January 1st and
ends on December 31st , that is the calendar but financial year
starts on 1st April and ends on 31st March.
Again this financial year can be divided into four quarters for
accounting purpose- Q1, Q2 , Q3 and Q 4.

Analysis

What is consumption GDP growth or why do we say economy

has been growing through consumption?

The first factors to be considered is -

 Private final consumption expenditure or PFCE

Expenditure made by the household on consumption, will see

that during Q1 of this financial year that is financial year 2019 is
8.6 % , but when we compare this growth percentage with the
previous quarter that is the march Q4 of financial year 2018 we
will see that it was only 6.7 %.
So the preceding quarter had 6.7 % and in the present Q1 it is
8.6 %. So from this data it is very clear that the private
consumption has grown or the household consumption has
increased.
In the terms of GDP we can say that in the june quater that is
Q1 of financial year 2019 the private final consumption
expenditure was 54.9 % of the GDP. So 54.9 % of GDP means
that the consumption growth is very strong and compared to the
previous quarter it has shown on increasing trend.

Now coming to the second factor-

 Investment or Gross fixed capital formation

The capital formation that has taken in the economy and capital
means those investments which will produce long term results or
impact. So gross capital formation or gross fixed capital
formation in an economy is the improvement in the investment
made in capital goods which will impact economy for a longer
period.
So in the Q1 we have seen at 10% increase in the gross fixed
capital formation. This 10 percentage growth is a good number
but if you consider the March quarter that is Q4 of financial year
2018 we will see that the growth percentage was 14.4% and in
terms of GDP this 10 percentage growth means 31.6% of GDP
and this 14.4% means 32.2 percentage of GDP. So this is in
terms of GDP.
So if we compare the investment demand we will see that in Q1
of financial year 2019 it has reduced from the Q4 financial year
2018 so it is showing a declining trend and investment demand
is one important factor that boost the economic growth of an
economy.
A declining trend in the investment demand means it is not
encouraging economic growth so the contribution would be
lesser.
Now coming to 3rd important factor that is -

 External sector

The performance of the external Sector also largely influences

the economic growth of an economy and let us see how the
performance of external sector in the Q1 is?
So we will see that that play on the goods and services has
increased sharply and reasons are one is partly due to higher
crude oil prices and secondly on account of increasing imports
because of these two factors the trade deficit during the Q1 has
also increased.
So we have seen the investment demand or the gross capital
formation has declined over the previous quarter.
Now the external also showing a downward or slowing down
Trend and the only sector which has shown the main sector for
main component which is only growing were the private final
consumption expenditure or household consumption.
It increased from 6.7 % to 8.6 %.
 Practical application and relating concepts with real
world

RBI report

 The report says that the liabilities of the household sector

went up some 2.4 % of the gross national disposable
income in 2016-17 to 4% in 2017-18 .
 According to the RBI annual report the credit card
outstanding is 30%.

So the consumption is also backed up by borrowing or private

lending.

Consequence

The inflation in the economy moved up to 4.8% in q1 from 2.4

% in March quarter.
That means that Q4 of financial year 18 inflation was 2.4 % the
q1 financial year 19 inflation is 4.8%.
We have seen that number has increased and what is inflation?
Inflation means the persistent rise in the prices of commodities
in the market.
So the rate of inflation has gone up and this is mainly due to
increase in consumption pattern.
Also I would like to add here that if you can remember the MPC
meeting or monetary policy committee meeting we will see that
in a row two time the monetary policy committee has increased
the interest rate.
So this interest rate hikes were in order to contain inflation.
So increase in interest rate means that the money supply will
come down and therefore the inflation also come down.
The demand pull inflation especially.
 Idea

Looking at the three important components i.e. the private final

consumption expenditure, second one investment demand and
the third one external sector will see that the consumption or the
private final consumption expenditure is the driving factor that
has led to economic growth in the economy.
So consumption was the driver economic growth and this
consumption was added by personal lending.
So this analysis clearly shows that the growth of Indian
economy was majorly due to consumption increased so it was
consumption driven growth and this consumption was also
backed up by lending.

Inflation is caused due to consumption expenditure

Let us see that through a graph-

  Let us take price P in the y-axis and quantity demanded Q
on the x-axis.
 Let's take a demand curve is downward sloping DD and
supply curve upward sloping SS.
 So the point where the demand curve and the supply curve
meets is known as the equilibrium point E.
 At equilibrium point E we have price P and quantity
demanded Q, so this is equilibrium point .
 Now at the equilibrium point the aggregate demand equal
to the aggregate supply that is why the demand curve and
supply curve meets at the equilibrium point.

Now let us assume that the demand in the economy has

increased.

 So when the consumption increase it mean that demand has

increased.
  When demand increases what happens with the demand
demand curve it will shift to the right so and increase in
demand in the economy has shifted the demand curve to the
right and this is the new demand curve DD1.
 Now at this new demand curve there is a new point where
the supply curve and the demand curve meets. So even
when the demand in the economy increases the supply
remain the same.

Because only one factor has changed so supply is the same

and the new equilibrium point will be even.

 At the new equilibrium point price will increase to P1 and

quantity demanded increases to Q1

Conclusion

So this concludes that –

 There will be price rise. We have seen an increase in the
prices so this leads to inflation that is the persistent rise in
the prices of commodities. When the demand or aggregate
demand in the economy increases this increases the prices
in the market leading to demand pull inflation .
 Secondly the quantity demanded increases so it clearly
means that consumption of the economy has increased so
what will happen the supply will also increase in order to
meet the new demand and when the supply increases in
order to meet the new demand what happens output
 increases or production increases and GDP which is the
monetary value of all the goods and services produced in an
economy so when output increases GDP increases and the
growth of an economy is measured in terms of GDP.

So this is how when the consumption increases the GDP

increases also inflation increases.

Reference

http://globalbizresearch.org/Singapore_Conference_August_201
7_1/docs/doc/1.%20Global%20Business,%20Economics%20&
%20Sustainability/S728.pdf

https://www.livemint.com/elections/opinion/opinion-the-
mystery-of-india-s-shrinking-consumption-story-
1567359385923.html

https://study.com/academy/lesson/what-is-consumption-in-
economics-definition-theory.html

https://www.nber.org/papers/w1391

https://www.britannica.com/topic/consumption

https://m.rbi.org.in/Scripts/AnnualReportMainDisplay.aspx

http://datatopics.worldbank.org/consumption/country/India