Business Today

Government Domestic Product, The New GDP?

The increased government spending is difficult to sustain.
Vivek Kaul   New Delhi     Print Edition: July 29, 2018
Government Domestic Product, The New GDP?

The Gross Value Added (GVA) numbers for 2017/18 grew by 6.47 per cent, the slowest in four years since the Narendra Modi government took over. Even as the numbers for the first quarter of 2018/19 are awaited, all trends show that even this jump would not have been possible without the government spending more.

While Gross Domestic Product (GDP) is a measure of the value of goods and services produced in an economy in a given period, GVA is what accrues to the producer before the product/service is sold. The GDP equals GVA plus indirect taxes minus subsidies. One of the constituents of GVA is public administration, defence and other services. It is a good representation of the government in the economy. Take a look at the top graph that plots the growth in public administration, defence and other services since FY2012/2013.

As is clear from this graph, the government, as part of the GVA, has grown in the last two financial years and the growth has been greater than 10 per cent. In the past, this type of growth in government was seen only in the aftermath of an economic crisis in 1999/2000 and then again in 2008/2009 and 2009/2010.

Now, take a look at the second graph (Economic Growth) that plots GVA growth and non-government GVA growth, after subtracting public administration, defence and other services from the GVA.

It clearly shows that in the last two years, the non-government GVA growth has been slower than the overall GVA growth. It also tells us that the overall GVA growth, and in the process, GDP growth, has been bumped up by the government spending more.

In fact, the total expenditure of the state governments as well as the central government increased from 26.3 per cent of GDP in 2014/2015 to 29.2 per cent of GDP in 2016/2017. The expenditure would have continued to remain high in 2017/2018 as state governments waived off farm loans. It has increased the expenditure of the state governments. The governments also need to compensate the banks, which had given these loans.

At the central level, with the implementation of the Seventh Pay Commission, salaries have gone up and there has also been an increase in defence pensions.

The larger point is that without this increase in government spending as part of the economy, the GVA would not have grown at 6.47 per cent as it did in 2017/2018. It also means GDP would not have grown at 6.68 per cent. GDP has now become the Government Domestic Product. The trouble is, it is clearly not sustainable. The government's ability to spend more continues to remain limited.

Vivek Kaul

Vivek Kaul is the author of Easy Money trilogy

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