India’s real growth rate and the forecast
For Prelims
What:
The editorial evaluates India’s GDP growth trajectory for 2024-25, based on the First Advance Estimates (FAE), projecting a real GDP growth of 6.4% and a nominal GDP growth of 9.7%. These estimates fall short of the Reserve Bank of India’s (RBI) revised targets of 6.6% and 10.5%, respectively.
It further analyzes sectoral growth, fiscal trends, and government investment strategies. The focus remains on understanding reasons for the slowdown and measures needed to sustain long-term growth.
Why:
The decline in GDP growth is attributed to the slowdown in government capital expenditure and global economic uncertainties. The editorial emphasizes the need for accelerated domestic investments to achieve sustainable growth rates.
Who:
- Government of India: Needs to enhance capital expenditure and address fiscal challenges.
- Private Sector: Encouraged to complement public investment with increased private capital formation.
- Global Stakeholders: Impacted by India's economic health as it contributes significantly to global growth.
For Mains
GS III: Indian Economy – Growth and Development; Fiscal Policy
Highlights of the Article
- The First Advance Estimates (FAE) for National Accounts in 2024-25 project real GDP growth at 6.4% and nominal GDP growth at 9.7%. These figures are slightly below the Reserve Bank of India’s updated projections of 6.6% for real GDP, as outlined in its December 2024 monetary policy update, and 10.5% for nominal GDP growth, as stated in the 2024-25 Union Budget released in July 2024.
- The 6.4% annual growth rate reflects a division into 6% growth during the first half of the fiscal year and 6.7% growth in the latter half, signaling a recovery from the 5.4% growth recorded in Q2.
- The significant drop in annual GDP growth compared to 8.2% in 2023-24 is noticeable only in GDP figures. When considering Gross Value Added (GVA), the decline is more modest, from 7.2% to 6.4%. Within GVA, the manufacturing sector has seen a marked reduction in growth, falling from 9.9% in 2023-24 to 5.3% in 2024-25
- The Gross Fixed Capital Formation rate, measured at constant prices, has hovered between 33.3% and 33.5% from 2021-22 to 2024-25, stabilizing around 33.4%. This trend is expected to continue in 2025-26.
- The average Incremental Capital Output Ratio (ICOR) has been slightly above 5 in recent years. Assuming an ICOR of 5.1 for 2025-26, a real GDP growth rate of approximately 6.5% appears achievable.
- Global economic conditions are unlikely to see significant changes, although uncertainties may arise from Donald Trump’s return to office. Consequently, India will primarily need to rely on domestic demand.
- The government must prioritize maintaining robust investment expenditure. The reduced growth in 2024-25 is largely attributed to a decline in government investment, which remained negative at (-)12.3% even after the first eight months of the fiscal year
Implications of Lower Nominal GDP GrowthWith nominal GDP growth in 2024-25 estimated at 9.7%, compared to the budgeted projection of 10.5%, the targeted Gross Tax Revenue (GTR) of ₹38.4 lakh crore might fall short if the budgeted buoyancy of 1.03 persists. According to data from the Controller General of Accounts (CGA), GTR growth for the first eight months stood at 10.7%. If this pace continues for the remainder of the fiscal year, the realized buoyancy would reach approximately 1.1, surpassing the budgeted level. This higher buoyancy could minimize potential tax revenue shortfalls, ensuring that fiscal constraints do not impede the government’s ability to meet its capital expenditure goal of ₹11.1 lakh crore |
- As of the first eight months of the fiscal year, the Government of India's capital expenditure stood at ₹5.14 lakh crore, accounting for only 46.2% of the budgeted target.
- Although there is scope to expedite spending in the remaining four months, it is likely to fall significantly short of the set goal. This shortfall has been a key factor contributing to the decline in overall real GDP growth for 2024-25
- To ensure robust economic growth in 2025-26, the government will need to maintain a strong focus on increasing capital expenditure, aiming for at least a 20% increase over the revised estimates for 2024-25.
- A sustained boost in public investment can create a positive ripple effect, encouraging private sector investments. Additionally, the composition and strategic allocation of government spending should be structured to effectively stimulate private investment growth
- Over the next five years, India’s real GDP growth is likely to stabilize around 6.5%, aligning with the International Monetary Fund's October 2024 projections for the period from 2025-26 to 2029-30.
- This growth rate, paired with an implicit price deflator (IPD)-based inflation of approximately 4%, could result in nominal GDP growth ranging between 10.5% and 11%.
- In favorable global economic conditions, particularly with significant contributions from net exports, real GDP growth could even reach 7%.
- Maintaining a consistent real growth rate of 6.5% and nominal growth of 10.5%-11%, combined with an average annual exchange rate depreciation of 2.5%, could potentially elevate India to a per capita GDP level comparable to developed nations within the next 25 years.
- However, achieving this will not be straightforward, as sustaining a 6.5% growth rate becomes increasingly challenging as the economic base expands.
- In fact, higher growth rates in the initial years are essential to maintaining momentum. At present, 6.5% appears to be the economy's potential growth rate, although this may evolve over time.
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