The role of Private consumption is important for economic growth

Arvind Virmani February 2006 PLANNING COMMISSION Working Paper No. 2/2006-PC LESSONS OF GOVRNMENT FAILURE

The post-independence political and administrative leadership was highly motivated, educated and honest. This situation prevailed for atleast 15 years or half the phase of Indian socialism (after which it perhaps started atrophying gradually). Despite its sincere efforts to develop India and rid it of the scourge of poverty, the proportion of citizens below the poverty increased. Despite drawing on the best development economists in the world and pioneering the concept of mixed economy and non-communist (sometimes referred to as 'Fabian') socialism, development performance as measured by the rate of per capita income was extremely poor compared to other countries...

One of the philosophical foundations of Indian socialism was that private consumption of the rich ('well off' or 'better off') must be reduced and their resources diverted into the public sector (directly through taxes or indirectly through the financial system). The result, contrary to assumptions was an increase in poverty. The puzzle is that poverty increased despite a growth of per capita income! Government was clearly appropriating too much resource, leaving little for the general public...

The second lesson is that, The role of Private consumption in economic growth and poverty reduction can be more important than that of Government/Public Consumption. One of the important pillars of the economic strategy under Indian socialism was to control private consumption(through controls on, production of and investment in, consumer goods and taxation of such goods) and divert resources into the government through steep/exorbitant income taxes...

Faster growth of private consumption has therefore driven the poverty reduction in phase II and probably contributed to the acceleration in growth through increased aggregate demand and consequent higher capacity utilisation and increase inexpected profitability of private investment in new consumer goods.

The third lesson is Government Investment is neither necessary nor sufficient for Growth...The government's thirst for intervention in all spheres of economic and social activity has far exceeded its ability to achieve positive outcomes in any of them...The government is neither omniscient (all knowing) nor omnipotent (all powerful) nor omni-competent. Even with the best of intentions and motivations it can and does fail spectacularly. More commonly it has traits that are the opposite of those commonly assumed by those who expect government to solve any and all problems. REPORTS SER PEO PO&RM Wk-PAPERS ARTICLES PUBLICATIONS