Assessment of private demand in India through expenditure side of GDP

The use of data on private final consumption expenditure (PFCE), as compiled by the Central Statistics Office (CSO), as an indicator of private demand, particularly for the purposes of monetary management, has come under criticism from some quarters in India on the alleged grounds that it is derived as a residual in the national income aggregates. This paper clarifies that PFCE is residually derived by the CSO only in the case of annual data. In the case of quarterly data on national income aggregates, PFCE is independently compiled through an indicator-based approach. At the same time, empirical analysis does not give evidence of co-integration between private and government final consumption expenditure(GFCE) both in annual and quarterly data. However, coefficient of correlation between private and government consumption has largely remained positive over the last two decades. The Granger-causality test shows some association between PFCE and Government final consumption expenditure (GFCE). This could be on account of the lagged impact of wages and salaries component of GFCE impacts PFCE positively. This is over and above the impact of Government transfer payments (such as interest payments and subsidies) which by definition do not form part of GFCE. Thus, quarterly data on PFCE, as compiled by the CSO, could be taken as an indicator of private demand in India, for policy purposes.