Overview of the GDP Growth Slowdown

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?

1. The NSO estimates India’s real GDP growth rate for 2024-25 at 6.4%, down from 8.2% in 2023-24.
2. 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?

1. 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).
2. This creates discrepancies in constant price GDP estimates, leading to anomalies in high-frequency economic trends.
3. 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%.
4. 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?

1. Despite an 8.2% real GDP growth in 2023-24, private corporate investments remained sluggish, focusing disproportionately on construction-related assets.
2. The private sector’s role in capital formation continues to underperform.
3. 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.’
4. 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?

1. During the UPA era (2004-2014), real private investment grew at over 10% annually, outpacing public investment (9%).
2. 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?

1. Quarterly Gross Value Added (GVA) growth has declined since 2023-24. Manufacturing, mining, construction, and services like retail trade, transport, and finance are slowing.
2. 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?

1. 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.
2. Slowing tax revenue growth has disrupted budgetary targets. Maintaining fiscal consolidation would require reduced public spending, further worsening the slowdown.
3. Abandoning fiscal discipline is not feasible due to high public debt and interest obligations.

What is the suggested way forward?

1. The government needs to rework its revenue strategy by enhancing taxation on wealth and corporate profits.
2. This would allow for increased capital expenditure and welfare spending without derailing fiscal prudence.