The consumption-led growth is the highlight of the year. On expenditure-basis, consumption has grown in 2017 by 7.9 percent. By adding 1.3 percent investment growth, the aggregate demand increase reached 9.2 percent. Adding the net exports' (exports minus imports) negative growth of 3.5 percent to the equation, GDP at market price growth is limited to 5.68 percent; while the growth of GDP at factor cost stands at 5.3 percent.
There is no doubt the economic demand is picking up; and the momentum is real. But one may wonder how sustainable the current growth model is. The marginal propensity to consume, which is already too high, is increasing further. On the flip side, domestic savings are declining, leaving foreign savings to fill in the requisite investment need. The dilemma is that if foreign savings become low, investment growth may compromise; else the external account imbalances worsen.
The GDP per capita surged by 6 percent in FY17 to reach $1629, surpassing last year's growth of 3 percent. The number is close to inflection point and the growth disruption amongst masses may be witnessed in years to come. Just as what happened in Indonesia in 1990s and in Turkey in the 2000s.
That is good news. Virtually all the sectors which are growing and expanding are catering to domestic demand - be it cement, steel, automobile, or many services subsectors. The problems lie in stagnating exporting sectors, and the players in these sectors are hesitant to expand.
Given a higher growth momentum, investment-to-GDP ratio is still very low. It provisionally stood at 15.8 percent in FY17, marginally up 23 basis points (bps) over previous year. The gross capital formation picked up a bit - within it, the private investment is falling while government investment (mainly in power and other infrastructure) is growing, with the toll standing at 9.9 percent and 4.3 percent, respectively.
The bad news is that domestic savings fell substantially - from 8.2 percent (FY16) to 7.5 percent in FY17. Domestic savings hovered between 15-18 percent during FY01-07; and after the economic crisis in 2008, it's on the downhill. There is no respite to consumption growth as depressed economic period resulted in low savings. The phenomenon is visible from upbeat retail, wholesale and trade growth since 2008. Mega malls are opening up, designer and food brands are on every nook and corner of urban centers. Meanwhile, car, motorcycle, and white goods' penetration is growing fast.
These are all healthy signs, encouraging investment in consumer sectors. The service sector's contribution to the economy is growing as it amounts to three-fifths of the economy. A new array of services is being added and new employment opportunities are opening up. But the bulk of the employment is in agriculture and industrial sectors, where the growth is not much.
For instance, direct employment generation by all the mega malls in Pakistan is probably less than one big-sized garment factory in Bangladesh. This explains the disparity in priorities of the two countries. The issue is that growth is not inclusive in Pakistan.
For example, the share of agriculture in the economy is one-fifth while it employs over two-fifths of the labour force. Similar is the story of labour-intensive industries (such as textile). The growth in agriculture and industrial sectors is low relative to services sector while the majority of employment is in these sectors.
One sector where growth is upbeat with higher employment concentration is construction. The sector contributed 2.7 percent to GDP in FY17 while it employs 7.3 percent of the labour force. The sector grew by 9 percent in FY17 - the growth was 13.1 percent in FY16. There is no other sector like construction in Pakistan which is labour-intensive and healthily growing as well.
There are arrays of services which are growing at a higher pace than GDP but which employ much less than their share in GDP. That is not good. The growth is not inclusive, which in turn increases income inequalities. Successive governments failed to address the issue of inequality and low savings. There is not much debate on the issues of what kind of economy we are building for the next generation. The good news is the economy may grow over 6 percent in FY18; and consumer-led growth momentum will continue till it lasts.
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