Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Charts & Analysis

60 Years of India’s GDP: The Fall of Private Consumption and the Rise of the Government


Any country’s Gross Domestic Product consists of:

GDP = Govt. Expenditure + Private Consumption + Investments + Inventories + (Exports-Imports)

If we were to plot these over the last 60 years, here’s how they have been, as a % of GDP:

GDP Distribution

We started off with very low government input into the GDP, and 90% of the GDP came from private consumption.

Over the years, consumption has slowed and investments have grown. The government has gone from 6% of GDP to 12%, and the Trade Deficit now eats up 8% of GDP.


The last four years have seen a marginal reversal in investments – down from 33% in 2007-08 to 30% in 2012-13. This has been replaced by government expenditure – which you can attribute to a bloated bureaucracy and subsidies. Inventories have added to GDP in the recent past, but nearer term data shows they are depleting fairly quickly.

How will next year look like? With the dollar at 62, we should see the trade deficit contribute less to “eating up” of GDP. With lower government expenditure, we might see a 11% or 10% figure in 2015 – but not before that. With high inflation, private consumption will look like it’s gone up, and investments will come down.

The longer term picture, though, tells you how meaningfully we’ve changed as a country in the last 60 years.

  • Karl says:

    This data highlights the fatal flaw in the Keynesian crap theory that that is taught in all business schools and which is religiously followed by our pseudo-economists. GDP = C + I + G + (X-M) so governments (and Keynes) believe that it is their duty to increase spending i.e. the G component of the GDP equation if consumption i.e. C goes down. Of course they conveniently neglect the fact that most government expenditures are funded by taxes since governments don’t produce real wealth but simply redistribute existing wealth.
    So we the people pay for the increased expenditure either by higher direct or indirect taxes or the worse stealth tax of them all i.e. inflation. Due to increased government expenditures financed by our taxes, the real producing economy will obviously spend less due to reduced disposable income or maintain our spending by borrowing more leading to even higher inflation.So the root cause of the fall in consumption is higher government expenditures which lower the disposable income of the real producing economy. You cannot have higher G and a higher C cause both are mutually exclusive.

  • anna says:

    In a emerging country like India, how the ideal distribution be?

    • Rajat Bose says:

      There is no ideal distribution as such for the GDP. However, emerging markets generally tend to show around 70% personal consumption (PC). Any figure below 60% for personal consumption is a worrying sign–it might be due to financial repression where transfer of wealth happens through high level of taxes, low real rate of return on personal savings and lack of avenues for household to save.
      China chronically repress personal consumption to boost an (over)investment driven growth in recent memory; however, similar strategies of repressing personal consumption were followed by Brazil in the 1960s, Soviet Union during 1950s and 1960s, Japan in the 1980s leading to lopsided growth and painful adjustments later. This might also happen for China. Few years back PC went down to as low as 40% and even the Chinese Premier then talked about correcting the “unbalanced growth” pattern. By the way, the US averages above 70% personal consumption figure in their GDP.
      High rate of personal savings and low level of personal consumption in China or for that matter in any country have nothing to do with their culture or ideology (Confucian in case of China) as is commonly made out to be by some commentators–it is chiefly due to the policies undertaken by a country’s government.
      Repressing personal consumption to boost investment driven growth (China) or managing current account deficit (India) is an unsustainable long term negative strategy. If pursued only for a very short period to make certain much needed adjustments they may be quite effective but taken too far in time has always been counterproductive.
      @Deepak–thanks for a very relevant and well written article.

  • Lalit Nambiar says:

    Nice Article !!!!!!!!!!
    I saw similar kind of charts and data points on
    if anyone interested in India’s macro analysis, he will find this useful.

  • XYZ says:

    The chart is nothing like the fear-mongering headline. The chart shows that things are not really bad in India. Investment is going in the right direction and government expenditure is not out of control. This is how it should be in a developing country. Investment-driven growth worked in East Asian countries. The proof is in the pudding not in some IMF prescription.
    Anyone interested in more detail can refer to these links:
    1. Why Adam Smith’s ‘classical theory’ correctly explained Asia’s growth – and how this clarifies why Paul Krugman’s critique of Asian growth failed to predict events
    2. Investment’s failure to recover is the key problem in developed economies
    I am not the author of the two pieces but I trust him because he has been correct against almost all the economists he has debated against. He also bases his arguments on published papers in economics. (Though the value of published papers in economics is questionable with the Rogoff-Reinhart episode).