Decoding India’s Growth Slowdown: Key Insights and Recommendations

What’s in today’s article?

• Current Growth Scenario
• Challenges in Private Investment
• Sectoral Analysis
• Fiscal Strains
• Policy Recommendations
• Long Term Considerations
• Conclusion

Current Growth Scenario

• Decline in Growth Rate:
  • The National Statistics Office (NSO) has estimated India’s real GDP growth rate at 6.4% for 2024-25, down from 8.2% in 2023-24.
  • This figure is below the 6.5-7% projection made in the Economic Survey 2023-24 and lower than the 10.5% nominal GDP growth estimate in the Union Budget.
• Data Discrepancies:
  • Economists and institutions like the IMF have raised concerns over the use of the Wholesale Price Index (WPI) as a deflator in GDP estimates.
  • Significant divergence between WPI and Consumer Price Index (CPI) rates has led to inconsistencies in nominal and real GDP calculations.

Challenges in Private Investment

• Sluggish Corporate Investments:
  • Despite corporate tax cuts in 2019, private investments in key sectors like machinery and intellectual property remain weak.
  • The majority of private investments are skewed towards “dwellings, other buildings, and structures,” reflecting an unhealthy mix.
• Comparison with UPA Era:
  • During the UPA regime (2004-2014), real private investment grew at 10% annually, outpacing public investment (9%).
  • Under the NDA (2014-present), private investment growth slowed to 6.3%, slightly below public investment growth (6.6%).
• Post-Pandemic Recovery:
  • While private investment rebounded in 2021-22 due to a base effect, sustained structural changes in private sector behaviour have been elusive.

Sectoral Analysis

• Divergent Performance:
  • Manufacturing: Showed double-digit growth in early 2023-24 but has since slowed down.
  • Mining, Power, and Construction: Experiencing significant slowdowns.
  • Services: Sectors like retail trade, transport, finance, and real estate show deceleration.
  • Public Administration and Defence: The only sector projected to grow faster in 2024-25, underscoring the role of public spending.

Fiscal Strains

• Revenue Shortfalls:
  • As of November 2024, only 56% of net tax revenue targets for 2024-25 have been achieved, while non-tax revenues reached 78% due to a surplus transfer from the RBI.
• Impact on Expenditure:
  • By November 2024, less than half of the ₹11.11 trillion capex target had been spent, disrupting public investment plans.

Policy Recommendations

• Revenue Mobilization:
  • Rework taxation policies to increase taxes on wealth and profits, enabling higher public spending on infrastructure and welfare programs.
• Encourage Private Investment:
  • Strengthen incentives for private sector investments in productive assets, particularly in manufacturing and intellectual property.
• Enhance Public Spending:
  • Focus on capital expenditure in sectors like infrastructure and renewable energy to stimulate economic growth.
• Data and Statistical Reforms:
  • Replace the WPI-based deflator with the Producer Price Index (PPI) for more accurate GDP estimates.
  • Ensure regular updates to GDP methodologies to reflect real-time economic changes.

Long Term Considerations

• Structural Reforms:
  • Introduce policies to improve ease of doing business and reduce bureaucratic delays in project approvals.
  • Enhance credit access for small and medium enterprises (SMEs) to stimulate broad-based economic growth.
• Global Integration:
  • Boost exports through trade agreements and incentivize manufacturing under programs like PLI (Production Linked Incentive).
• Focus on Consumption:
  • Strengthen rural demand through direct income support and employment generation schemes like MGNREGA.

Conclusion

• India’s economic growth faces challenges from inconsistent private investments, sectoral slowdowns, and fiscal pressures.
• To overcome these hurdles, a balanced approach combining enhanced revenue mobilization, targeted public spending, and robust private sector incentives is essential.
• Addressing statistical discrepancies and adopting long-term structural reforms can pave the way for sustainable economic growth.

Q1. What is Disguised Unemployment?

Disguised unemployment occurs when part of the labour force is either left without jobs or operates redundantly, such that the productivity of the workforce is effectively zero. It is unemployment which has no impact on aggregate production.

Q2. What is Structural Unemployment?

Structural unemployment is a form of involuntary unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers. Structural unemployment is often brought about by technological changes that make the job skills of many workers obsolete.

Source: TH

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