Originally published on Mises India
The Indian central bank RBI recently said that,
Indian government consumption key to growth in economy amid pandemic.
Indian government spending will support the economy during the pandemic, but private consumption will be needed to drive any economic recovery once the coronavirus threat eases.
Is it so? Is government spending and consumption key to growth? Is citizens’ spending and consumption key to growth? In many of my previous articles I have exposed this Keynesian fallacy of thinking that consumption can drive growth. It is a blatantly false notion.
Growth means future higher income compared to today’s income. To increase any future income we need increased productivity of various factors of production like land and labor, and that is only possible when we use capital goods in combination with those factors of production. Capital goods, machine and tools, are not available in nature like land and labor and so they needed to be produced first. Capital goods’ production requires investment and investment in turn comes from saving which in turn comes from prior income. Saving is what we do not consume. To consume less than what our income is is saving. Saving means sacrificing some of our present consumption so as to invest those saved resources to produce capital goods which will result in higher future income i.e., economic growth.
This economic fact tells us that Indian government and peoples’ increased consumption will actually lower economic growth! Government consumption is not only totally wasteful but it also fuels various problems like poverty and income and wealth inequality. In the absence of market price and profit & loss system politicians have no way of knowing where resources are most urgently needed. Government central planning can’t do economic calculation and so it is by its very nature wasteful activity. RBI’s action of fueling consumption via its easy money policy is what has killed and buried the Indian economy ten feet underground.
Even a layman will understand this simple logic that if I have 100 rupees today and if I consume all of that in evening then next morning I will start with 0 income i.e., no growth. If I consume my daily income in evening then I will remain poor with 0 income next morning forever. There can’t be and won’t be any growth whatsoever in such situation of higher consumption. Any consumption by definition will lower future growth.
RBI, who follows the false Keynesian economics of looking at imaginary concepts like aggregate demand, can’t be more wrong than this. Consumption can never be an engine of growth which has everything to do with better future. Consumption can never drive any economic recovery. It will only make our future more poorer. Sacrificing present consumption, saving, investment and accumulation of physical and human capital is what will result in growth. If you eat your earning today then you are left with nothing for tomorrow. There is zero growth then. RBI is our enemy. It is enabling this big government with its wasteful big spending/consumption in India which is wrecking havoc everywhere. Dismantling RBI should be our top priority on an urgent basis if we common Indians want any growth and progress in future.