Consumption based growth

GDP = C+G+S+TB. The famous equation constitutes components of GDP and changing shares of its variables depict the story of our economic growth. The slight economic recovery in this year with estimated growth at 3.7 percent (target: 4.2 percent) against past five years average growth of 3.0 percent is attributed to the increase in the share of private consumption at the cost of falling savings.
Is such a shift desirable? This is a policy dilemma for Sheikh and Haq, the economists at the helm of the economy. If steps are taken to slash consumption, chances are there will be little effect on domestic savings and investments. The reason is simple - the driver of higher consumption based growth are ballooning home remittances sent back home to match the needs of growing needs of burgeoning youth. Remittances are now over a billion dollar per month versus a billion dollar per year a decade back. Any attempt to scale back consumption would lead to reduced needs for remittances to support this consumption.
Total consumption has reached 88.4 percent (private consumption: 75%) in FY12 versus 83 percent in the previous year. This growth translates to 9 percent (real term: 2.3%) increase in per capita income to $1,372 in FY12.
The most worrisome fact which requires a lot of policy deliberation is that real investment is thin; a mere 12.5 percent of GDP (at 50 year-low) with fixed investment down to 10.9 percent of GDP. Eroding purchasing power of the local currency and growing consumption needs in the urban areas are driving down the savings.
Higher consumption is being witnessed at the expense of savings - National savings stood at 10.7 percent of GDP (FY11: 13.2%) in FY12. That is why even at this abysmally low investment the resource gap between investment and savings is at 1.8 percent which is to be filled by foreign savings - pressurizing the currency and fueling inflation.
The problem exacerbates when private savings are mostly used to plug in the resource gap of the government. The fiscal deficit is at 5 percent for 10MFY12 and is easily going to hover around 6.2-6.5 percent of GDP. Mind you, including the government cover on outstanding circular debt and commodity financing the deficit may well surpass 8.5 percent of GDP.
The dilemma is that the coming year is an election year; and the government is likely to play safe and there are no voices on additional taxation or other measures to enhance revenues, curbing subsidies or to stop the hemorrhaging public sector entities.
The ball is now in the court of the provinces. In the last two years, the Federal Government has transferred over Rs800 billion additional, over the FY10 resource transfer of Rs633 billion after the success of 7th NFC award. But the provinces are not showing any surpluses nor have they taken any major steps to build up their own revenue resources to meet the spirit of sharing after 18th Amendment with the exception of Rs19 billion generated by Sindh on taxing services.
Now with the Punjab Government at loggerheads with the Parliament and Prime Minister, chances of coordination on budget making and expenditure sharing under the ambit of the Council of Common Interests are thin.