Decoding India’s Growth Slowdown

Table of Contents

Context: The first advance estimates of India’s Gross Domestic Product (GDP) for the fiscal year 2024-25, released by the National Statistics Office (NSO).

What was the Finding?

A decline in the real GDP growth rate to 6.4%, down from 8.2% in 2023-24.
This figure is below the 6.5% to 7% range projected in the Economic Survey of July 2024.
The nominal GDP growth rate is estimated at 9.7%, significantly lower than the 10.5% projected in the last Union Budget.

Elusive Private Investment

Economic Survey Insights: The Economic Survey 2023-24 expressed optimism about private sector investment but raised concerns regarding sluggish corporate investments in machinery and equipment.
- The Union Budget relied heavily on a revival of private corporate capital expenditure (capex) to support initiatives like the ‘Prime Minister’s Package for Employment and Skilling,’ which aimed to benefit 41 million youth over five years.
Declining Growth in Fixed Capital Formation: Recent estimates reveal a decline in real gross fixed capital formation growth from 9% in 2023-24 to 6.4% in 2024-25, suggesting that expectations for private investment-led growth may be overly optimistic.

Sectoral Analysis and Public Spending

Sector-Wise GVA Trends:
- Declines: Manufacturing, mining, construction, services (retail trade, transport, communications, finance).
- Growth: Public administration, defence, and other services remain strong due to public spending.
Public Spending’s Role: The only sector projected to grow faster in 2024-25 compared to the previous year is public administration and defense services, highlighting the importance of public spending for sustaining economic growth.

Budgetary Challenges

Monthly accounts reveal that crucial revenue and expenditure targets set in the last Union Budget are likely unachievable.
- By November 2024, net tax revenues were only 56% of the budgetary target of ₹25.83 trillion.
This shortfall has resulted in less than half of the budgeted capital expenditure of ₹11.11 trillion being spent by November 2024.

Data Discrepancies in GDP Estimates

Use of Deflator: The GDP deflator (weighted average of WPI and CPI) is flawed due to the volatility of WPI.

IMF Observations

Recommended replacing WPI with Producer Price Index (PPI).
Highlighted discrepancies in GDP by activity and expenditure.

Divergences in Inflation Rates

WPI inflation dropped to -0.7% in 2023-24 from 4% in 2022-23, while CPI inflation stood at 5.4%.
Resulted in a GDP deflator of only 4%, contradicting nominal and real GDP trends.