India’s real growth rate and the forecast

The First Advance Estimates (FAE) of National Accounts for 2024-25 have been released, showing a real GDP growth of 6.4% and a nominal GDP growth of 9.7%. These figures are lower than the Reserve Bank of India’s revised expectations, reflecting a slowdown in the economy compared to earlier projections.

Real and Nominal GDP Growth Estimates

• Real GDP Growth: The real GDP growth for 2024-25 is projected at 6.4%, with an improvement expected in the second half of the year (6.7%) compared to the first half (6%). This represents a recovery from Q2 growth, which was 5.4%.
• Nominal GDP Growth: The nominal GDP growth estimate stands at 9.7% for 2024-25, falling short of the 10.5% forecasted in the Union Budget. This shortfall could affect revenue projections and fiscal management.
• GDP vs GVA Growth: The sharp decline in real GDP growth from 8.2% in 2023-24 is significant, but GVA growth has seen a smaller drop. Manufacturing experienced a marked slowdown, with GVA growth falling from 9.9% in 2023-24 to 5.3% in 2024-25.

Capital Formation and Investment Outlook

• Fixed Capital Formation (GFCF): The Gross Fixed Capital Formation rate has remained stable around 33.4% from 2021-22 to 2024-25, with expectations to maintain this level in 2025-26. Continued government investment is crucial to sustain growth.
• ICOR and GDP Growth Projections: The Incremental Capital Output Ratio (ICOR) is expected to be 5.1 in 2025-26, suggesting a realistic growth rate of 6.5% for real GDP, with India relying heavily on domestic demand.
• Government Investment: The Government of India’s capital expenditure has been slow in 2024-25, with a shortfall of ?5.14 lakh crore, which is 46.2% of the target. Accelerating capital expenditure in the remaining months is vital to achieve growth targets.

Long-term Growth Prospects and Challenges

• Medium-term Growth: Over the next five years, India’s real GDP growth rate is expected to average around 6.5%, in line with IMF projections, with nominal GDP growth reaching 10.5%-11%.
• External Conditions and Global Uncertainty: While global conditions may remain uncertain, India will need to depend primarily on domestic demand to sustain growth, especially as international factors remain unpredictable.
• Sustained Government Capital Expenditure: To support private investment and ensure long-term growth, the government needs to maintain a robust capital expenditure program, ideally growing at least 20% compared to revised estimates for 2024-25.

Practice Question

Q: Critically analyze the First Advance Estimates (FAE) of GDP growth for 2024-25. Discuss the factors contributing to the projected slowdown and the implications for India’s medium- to long-term economic growth prospects.