Source: This post on Overview of the GDP Growth Slowdown has been created based on article “Decoding India’s growth slowdown” published in The Hindu on 10th January 2025.
UPSC Syllabus- GS-3 -Indian Economy
Context: The article analyzes the slowdown in India’s economic growth, as reflected in the first advance estimates of GDP for 2024-25, released by the National Statistics Office (NSO). These estimates show a significant decline in both real and nominal GDP growth rates, raising concerns about the robustness of India’s economic recovery post-pandemic and the sustainability of its fiscal and investment strategies.
What does the NSO’s latest GDP estimate for 2024-25 indicate?
- The NSO estimates India’s real GDP growth rate for 2024-25 at 6.4%, down from 8.2% in 2023-24.
- This is lower than the 6.5%-7% projection from the Economic Survey (July 2024). Nominal GDP growth is estimated at 9.7%, below the 10.5% expected in the Union Budget.
Why are India’s official GDP estimates questioned?
- Experts, including the IMF, have flagged issues such as reliance on the Wholesale Price Index (WPI) as a deflator instead of the Producer Price Index (PPI).
- This creates discrepancies in constant price GDP estimates, leading to anomalies in high-frequency economic trends.
- For example, in 2023-24, nominal GDP growth fell from 14.2% to 9.6%, but real GDP growth rose from 7.0% to 8.2%.
- This was due to an implausibly low GDP deflator (1.4%) despite retail inflation being 5.4%. Such discrepancies cause policy errors and confusion.
How has private investment contributed to GDP growth recently?
- Despite an 8.2% real GDP growth in 2023-24, private corporate investments remained sluggish, focusing disproportionately on construction-related assets.
- The private sector’s role in capital formation continues to underperform.
- The Union Budget counted on a corporate-led capex revival and announced schemes like the ₹2 trillion ‘Prime Minister’s Package for Employment and Skilling.’
- However, real gross fixed capital formation growth has dropped from 9% in 2023-24 to 6.4% in 2024-25.
How has private investment fared historically?
- During the UPA era (2004-2014), real private investment grew at over 10% annually, outpacing public investment (9%).
- Under the NDA (2014-2020), private investment growth slowed to 6.3%, below public investment growth of 6.6%. Post-pandemic, there has been no significant structural shift in private corporate investment behavior.
What do supply-side data reveal about sectoral growth?
- Quarterly Gross Value Added (GVA) growth has declined since 2023-24. Manufacturing, mining, construction, and services like retail trade, transport, and finance are slowing.
- The only sector expected to grow faster in 2024-25 is public administration and defense, underscoring the role of public spending.
What is the status of the government’s fiscal position?
- As of November 2024, only 56% of the ₹25.83 trillion net tax revenue target has been achieved, while non-tax revenues benefited from a ₹2.11 trillion RBI surplus transfer. Capex spending remains below 50% of the budgeted ₹11.11 trillion for 2024-25.
- Slowing tax revenue growth has disrupted budgetary targets. Maintaining fiscal consolidation would require reduced public spending, further worsening the slowdown.
- Abandoning fiscal discipline is not feasible due to high public debt and interest obligations.
What is the suggested way forward?
- The government needs to rework its revenue strategy by enhancing taxation on wealth and corporate profits.
- This would allow for increased capital expenditure and welfare spending without derailing fiscal prudence.
