08th January 2025 (14 Topics)
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Slowdown in GDP Growth
Context
India's projected economic growth for 2024-25 has been revised downward to 6.4%, a significant deceleration compared to the 8.2% growth achieved in 2023-24. This marks the lowest growth forecast since the pandemic-induced contraction of 5.8% in 2020-21.
Key Points:
- GDP Growth Estimate: The National Statistical Office (NSO) released the first advanced estimates for 2024-25, projecting a 4% GDP growth, down from 7% in 2023-24 and 8.2% in 2022-23. The initial forecasts by the RBI and the government had expected growth rates closer to 7%, but the recent estimates indicate lower-than-expected momentum.
- Expenditure Side: The slowdown in growth is largely attributed to a decrease in investment rather than consumption. Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE) are expected to show an increase in growth, from 4% to 7.3% and 5% to 4.1%, respectively. However, Gross Fixed Capital Formation (GFCF), a key indicator of investment, is expected to slow from 9% to 6.4%.
- Sectoral Growth: Growth in the manufacturing sector is anticipated to decelerate significantly, with a projected 3% growth in 2024-25 compared to 9.9% in 2023-24. In contrast, sectors like agriculture and public administration, defense, and other services are expected to show better growth rates.
Impact on fiscal and monetary policy decisions
- Impact of Monetary Policy: Given the slowdown in investment, many economists expect the RBI to adopt a more accommodative stance on monetary policy, potentially cutting interest rates to support economic activity.
- Fiscal Policy: The Union Budget will play a crucial role in shaping India's fiscal strategy. While there is a commitment to fiscal consolidation, economists expect the government to balance its fiscal targets, including a 9% fiscal deficit for 2024-25, with the need to stimulate growth amid softer tax revenues and global volatility.
Challenges:
- Investment Slowdown: A slowdown in investment could signal subdued expectations for future demand, creating a vicious cycle that may further dampen growth prospects.
- Manufacturing Weakness: The manufacturing sector, a key engine of economic growth, is facing significant headwinds. If this slowdown persists, it could have long-term effects on India's industrial capabilities.
- Revenue Shortfall: Nominal GDP growth for 2024-25 is expected to be 7%, lower than the 10.5% assumed in the 2024 Union Budget. This reduction could lead to a shortfall in revenue collections, further complicating fiscal policy.
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