India’s Real Growth Rate and the Forecast
18-01-2025
10:30 AM

Context
- The First Advance Estimates (FAE) of National Accounts for 2024-25 indicate a real GDP growth rate of 6.4% and a nominal GDP growth rate of 9.7%.
- These figures, while significant, fall short of the RBI December 2024 revised growth estimates of 6.6% for real GDP and 10.5% for nominal GDP as projected in the Union Budget of 2024-25.
- The deviation highlights emerging challenges in sustaining robust economic growth in India, compounded by both domestic and international factors.
Analysis of the 2024-25 Economic Performance and Reason Behind the Dip
- The annual GDP growth rate of 6.4% during 2024-25 reflects an improving trend within the fiscal year, with growth accelerating from 6% in the first half to 6.7% in the second half.
- This demonstrates recovery from the lowest point (5.4%) during the second quarter (Q2) of the fiscal year 2024-25.
- However, the decline from the 8.2% growth achieved in 2023-24 underscores the transient nature of the previous year’s performance.
- The manufacturing sector, in particular, experienced a sharp slowdown, with growth dipping from 9.9% in 2023-24 to 5.3% in 2024-25, a key factor contributing to the lower overall Gross Value Added (GVA).
- Government investment trends also play a crucial role in this scenario.
- Capital expenditure growth by the Government of India has been subdued, with only 46.2% of the ₹11.1 lakh crore Budget target achieved by the end of the first eight months of 2024-25.
- Despite potential acceleration in the final months, the shortfall in government spending has directly affected overall growth.
Prospects for Growth in 2025-26
- The Role of Investment
- Investment activity, reflected in the Gross Fixed Capital Formation (GFCF) rate, has shown consistent stabilisation around 33.4% over the past few years.
- This stability provides a solid foundation for economic growth, indicating sustained capital deployment in productive activities.
- Maintaining this level of investment in 2025-26 will be critical, particularly as India aspires to bridge its infrastructure deficit and boost industrial capacity.
- Public sector capital expenditure is a pivotal driver of investment activity.
- To catalyse private investment, the government will need to adopt an aggressive approach to infrastructure spending, ensuring an annual growth rate of at least 20% in capital expenditure based on the revised estimates for 2024-25.
- This strategy can create a multiplier effect, increasing private sector participation, enhancing productivity, and generating employment.
- Private Investment and Domestic Demand
- The alignment of government policies with the needs of the private sector will play a critical role in improving investment.
- By creating a favourable environment through regulatory reforms, fiscal incentives, and robust public-private partnerships (PPPs), India can attract more private capital into infrastructure, manufacturing, and technology.
- Additionally, sustained domestic demand, driven by rising income levels and urbanisation, will ensure that private investments yield substantial returns.
- The Role of Incremental Capital Output Ratio (ICOR)
- India’s average ICOR, a measure of investment efficiency, has remained slightly above 5 in recent years.
- This suggests that every ₹5.1 of investment generates ₹1 of GDP. To achieve a 6.5% growth rate in 2025-26, the current ICOR must be maintained or improved.
- Lowering ICOR through enhanced productivity and innovation will be crucial in maximising the returns on both public and private investments.
- Global Economic Uncertainty
- External factors, including geopolitical shifts and global economic conditions, will significantly influence India’s growth trajectory.
- The uncertainty surrounding global trade and financial flows, exacerbated by Donald Trump’s return to office and potential shifts in U.S. foreign policy, may create challenges for India’s export-driven industries.
- However, India’s relatively low dependence on external demand and a large domestic market provide a cushion against global shocks.
- Fiscal Policy and Revenue Mobilisation
- A critical aspect of the growth strategy for 2025-26 is ensuring fiscal discipline while sustaining high levels of capital expenditure.
- The Government of India’s ability to achieve its capital expenditure targets will depend on effective revenue mobilisation.
- In 2024-25, despite nominal GDP growth falling short of the budgeted 10.5%, tax revenue growth has shown resilience, with a realised buoyancy of about 1.1.
- This trend, if sustained, will ensure minimal revenue shortfalls, enabling the government to maintain its focus on developmental expenditure without exacerbating fiscal deficits.
- Boosting Productivity through Reforms
- Structural reforms in critical sectors, including agriculture, labour markets, and financial systems, will play a decisive role in ensuring sustained growth.
- For example, modernising agriculture through technology and market reforms can unlock higher productivity.
- Similarly, labour reforms can facilitate greater workforce participation and skill development, contributing to a more competitive manufacturing sector.
- Energy and Sustainability
- India’s transition to renewable energy and its commitment to sustainability also hold significant growth potential.
- Investment in green infrastructure, solar and wind energy, and electric vehicles (EVs) can create new economic opportunities while reducing reliance on fossil fuels.
- This alignment with global sustainability goals will not only attract foreign investment but also position India as a leader in the global energy transition.
- Sectoral Growth Dynamics
- Key sectors such as manufacturing, services, and construction will be instrumental in achieving the targeted growth rate.
- Revitalising manufacturing through initiatives like Make in India and focusing on innovation in technology-driven sectors can enhance productivity.
- Meanwhile, the service sector, particularly IT, financial services, and tourism, is expected to remain a significant contributor to GDP growth, supported by digitalization and global outsourcing opportunities.
Evaluations of the Current Growth Rate in the Context of Long-Term Growth Projections
- Long-Term Growth Projections
- Over the next five years, India’s potential GDP growth rate is estimated at 6.5%, aligning with the International Monetary Fund’s (IMF) projections for the Indian economy from 2025-26 to 2029-30.
- Nominal GDP growth during this period is expected to range between 10.5% and 11%, driven by an implicit price deflator (IPD)-based inflation of about 4%.
- In favourable global conditions, real GDP growth could rise to 7%, particularly if net exports make a significant contribution.
- Achieving this growth trajectory would position India for developed country status within the next two and a half decades.
- However, maintaining consistent growth will become increasingly challenging as the economic base expands.
- Early years will demand higher growth rates to lay the foundation for sustained performance.
- Evaluating the Current Growth Rate
- In this context, the 6.4% growth rate for 2024-25 should not be viewed as disappointing. Instead, it reflects the economy's alignment with its potential growth trajectory.
- The remarkable 8.2% growth in 2023-24 can be seen as an anomaly, fuelled by post-pandemic recovery and other transient factors.
- The 2024-25 performance, while modest, underscores the need for strategic planning to capitalise on domestic demand and enhance productivity.
Conclusion
- India’s growth story is marked by a delicate balance between aspiration and realism.
- The 6.4% growth in 2024-25 signals a return to a more sustainable trajectory, with future growth heavily reliant on proactive government policies, strategic investments, and private sector participation.
- In the medium term, a focus on structural reforms and capital investment will be vital to achieve and sustain the 6.5% potential growth rate.
- While challenges remain, the steady alignment with long-term growth potential sets a promising foundation for India’s economic ambitions.
Q) What is the projected real GDP growth rate for India in 2025-26, and what factors will drive this growth?
The projected real GDP growth rate for India in 2025-26 is 6.5%. This growth will be driven by stable domestic demand, sustained government capital expenditure, private sector investment, and improved investment efficiency as measured by the Incremental Capital Output Ratio (ICOR). Structural reforms, energy transitions, and favorable fiscal policies will also play a crucial role.
Q) How can the government’s capital expenditure impact private sector investment in 2025-26?
The government’s capital expenditure can act as a catalyst for private sector investment by creating infrastructure, boosting productivity, and improving investor confidence. Sustaining an annual capital expenditure growth of 20% or more will likely generate a multiplier effect, encouraging private sector participation in key areas such as manufacturing, infrastructure, and technology.
Source:The Hindu