Declining share of consumption in GDP

The Business Standard |
Sajjad Zohir |
28 June, 2024 |

The post-budget discourses often take off from commonly observed statistics. One such statistic was the declining share of consumption in gross domestic product, C/Y. A young reporter called me to get a quick reaction that she could use as a quote. I was puzzled with such demands since GDP is an accounting construct and there may be
numerous ways that C, a component in the calculation of Y, could change as a share of Y.

I texted her, mentioning that,
Y = C + I + G + X – M
In fuller form, it means, calculated GDP (Y) is the sum of Private Consumption (C), Investment (I) that comes from private savings and external borrowings, Government expenditure (G) and net export (i.e, export (X) minus import (M)).

Thus, C/Y may decline over a period if the increase in Y was due to increases in any one or more of the three components — I, G and (X-M). That is, C/Y may decrease if,
– Investment increased without resulting in increase in household (employment and) income.
– Government expenditure increased with no or less than proportionate increase in private (income and) consumption. Increases in debt servicing at home and abroad,
as well as unabated salary increases have increased government expenditure.
– Export increased and/or import declined.

I faced hard time convincing the reporter that it is an accounting construct and one should unbundle the reasons within the GDP equation for possible decline in C/Y, and ‘unbound’ remarks should not be entertained!

When one introduces the behaviors of consumers and saver, one may further argue that
– Household income = disposable income + tax paid + savings; and
– Consumption depends on disposable income once the inflationary adjustments are
made. Within a systemic approach, one may consider that as inflationary tax,
distinct from other forms of direct (say, income tax) or indirect (say, VAT) taxes.

Since bank deposit rates have gone up, households are likely to save (relatively) more and reduce consumption. Surely, the aggregate savings will show up in investment (in an accounting sense). Moreover, increased export means decline in availability of goods and produce for domestic consumption. Furthermore, a decline in import, on account of shortfalls in foreign currencies, is expected to have had negative effect on local consumption.

Surely the unbundling of the GDP equation is too long for a reporter’s demand for quick reaction, and yet, it remains too short for establishing meaningful links with policies. And I was unable to satisfy the reporter’s demand!

The generalized explanations of a decline in consumption’s share in income would suffice if changes in past assets were taken into account. We often face crisis by resorting to assets accumulated in the past, that, in negative form, includes liabilities as well. That is, we may borrow (increase liability) or deplete our assets to sustain a minimum consumption level during periods of crisis. Unfortunately, the GDP accounting in Bangladesh is yet to formally account for changes in the important ‘stock’ variable, assets and liabilities. No wonder, we tend to glorify the (income and consumption) flows that come with increased liability for the future generation!

* The author is the Executive Director of Economic Research Group (ERG).
Views and interpretations may not be shared by other members of ERG.