India's GDP Growth Slows to 6.4% in FY25

What’s in Today’s Article?

• Some Key Economic Concepts
• GDP Projections for FY25
• Other Economic Indicators for FY25
• Challenges for Sustained Growth
• Implications of GDP Forecast and Way Forward
• Conclusion

Why in News?

• India's real Gross Domestic Product (GDP) is projected to grow at 6.4% in the financial year 2024-25 (FY25), marking a four-year low.
• This slowdown is attributed to weak industrial and investment growth, according to the National Statistics Office (NSO).
• The forecast is below the Reserve Bank of India's (6.6%) and the government's estimate (6.5-7%) for the same period.

Some Key Economic Concepts

• Gross Domestic Product (GDP): It is defined as the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
  • It measures the value of total output in the economy by tracking the total demand.
• GDP = C + I + G + NX
  • Consumption (C): The biggest engine (56% of all GDP) is consumption demand from private individuals, technically known as Private Final Consumption Expenditure (PFCE).
  • Investment (I): The second-biggest engine (32%) is the investment demand generated by private sector businesses, also known as Gross Fixed Capital Formation (GFCF).
  • Government (G): The third engine (11%) is the demand for goods and services generated by the government and is known as the Government Final Consumption Expenditure (GFCE).
  • Net Exports (NX): This is calculated by subtracting Indian imports from the Indian exports.
• Nominal vs Real GDP:
  • Nominal GDP (GDP calculated using current market prices) is the actual observed variable. However, Real GDP (GDP calculated using constant 2011-12 prices, after taking away the effect of inflation) is a derived metric.
  • Real GDP = Nominal GDP - Inflation Rate. Inflation is the rate at which the value of a currency is falling and consequently the general level of prices for goods and services is rising.
  • From the Budget-making perspective, nominal GDP is important. However, from the perspective of the common people, real GDP is what matters.
• Gross Value Added (GVA): It examines the amount of value added (in monetary terms) in various productive areas of the economy. It tracks the total output in the economy by looking at the total supply.
• GDP vs GVA:
  • GDP = (GVA) + (Taxes earned by the government) - (Subsidies provided by the government). The difference between these two absolute figures will reveal the government's role in the process.
  • For example,
    • GDP > GVA, if the government generated more money from taxes than it spent on subsidies.
    • GVA > GDP, if the government gave subsidies in excess of its tax collections.
• Fiscal deficit:
  • A fiscal deficit is a shortfall in a government's income compared with its spending.
  • It is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.

GDP Projections for FY25:

• Nominal vs. Real GDP:
  • Nominal GDP: Expected at ₹324 lakh crore (9.7% growth), translating to $3.8 trillion at an exchange rate of ₹85 per USD.
  • Real GDP: Estimated at ₹184.9 lakh crore, 57% of nominal GDP, accounting for inflation effects.
• Factors behind the sluggish growth: (Economic slowdown drivers)
  • Cyclical slowdown: Indian economy faces a downturn in growth momentum over the past three quarters.
  • Key influences:
    • Strong base effect.
    • Impact of general elections.
    • Weak private sector capital expenditure (capex).
    • Monetary and fiscal tightening measures.

Other Economic Indicators for FY25:

• Sectoral performance:
  • Primary and secondary sectors:
    • Agriculture: GVA growth rises to 3.8% in FY25 (1.4% in FY24).
    • Manufacturing: GVA growth dips to 5.3% from 9.9% in FY24.
    • Electricity, gas, and utilities: Growth slows to 6.8% (7.5% in FY24).
    • Construction: Grows at 8.6% (9.9% in FY24).
    • Mining and quarrying: Grows at 2.9%, down from 7.1% in FY24.
  • Services: Estimated growth at 7.2%, led by public administration (9.1%).
    • Trade, hotels, and transport: Growth slows to 5.8% (6.4% in FY24).
    • Financial and professional services: Grows at 7.3% (8.4% in FY24).
• Consumption and investment trends:
  • Private Final Consumption Expenditure (PFCE): Expected to grow at 7.3% (4% in FY24).
  • Gross Fixed Capital Formation (GFCF): Growth moderates to 6.4% from 9.0% in FY24.
• Government spending and fiscal impact:
  • Government Final Consumption Expenditure (GFCE) growth rises to 4.1% in FY25 from 2.5% in FY24.
  • Lower nominal GDP growth (9.7%) compared to budget estimates may not significantly impact fiscal deficit targets.

Challenges for Sustained Growth: 

Key engines of GDP showing sluggish growth.

• Private consumption: Slow CAGR of 4.8% since FY20 hinders growth.
• Government spending: Limited fiscal expansion since 2019 (CAGR of 3.1%).
• Investments: Stagnation in private and public sector capex since 2014 (CAGR of 5.3%).
• Net exports: Persistent trade deficit, although narrowing in FY25.

Implications and Way Forward:

• Insights for policymakers:
  • The latest GDP data underscores a deceleration in economic growth.
  • While India has shown high growth rates post-pandemic, much of this was due to statistical base effects.
  • A closer look at long-term trends reveals real economic growth of less than 5% annually since FY20, far below the 7% average required to achieve developed country status by 2047.
• Strategic interventions needed:
  • Boost private consumption to encourage investments.
  • Enhance public sector capex to revitalize economic growth.
  • Leverage rural demand and improve urban wage growth.

Conclusion:

• India's GDP growth trajectory in FY25 highlights pressing structural challenges.
• While government spending and rural demand offer some support, a holistic approach addressing consumption, investments, and trade is critical to sustaining long-term growth.

Q.1. Why is GDP forecasting important?

If the growth in GDP is expected to be strong, the government may enact tighter policies. On the other hand, if GDP growth is expected to be slow, the government may enact expansionary policies. Investors also use GDP growth forecasts to make informed decisions.

Q.2. Why is primary deficit?

A primary deficit is the difference between a government's fiscal deficit and the interest payments it makes on previous debt.

Source: IE | IE