The Hindu Editorial: Published on 18th Jan 2025:
Why in News?
- India’s First Advance Estimates (FAE) for 2024-25 indicate a real GDP growth rate of 6.4%, which is below the Reserve Bank of India’s revised estimate of 6.6%.
- Nominal GDP growth is projected at 9.7%, falling short of the 10.5% forecasted in the Union Budget for 2024-25.
- The lower-than-expected growth highlights key issues such as subdued government capital expenditure and sectoral challenges, particularly in manufacturing.
Key Insights from the Data:
Growth Trajectory:
Real GDP growth in the second half of 2024-25 is expected to improve to 6.7%, compared to 6% in the first half.
The annual GDP growth has decelerated from 8.2% in 2023-24 to 6.4% in 2024-25, a decline attributed to government investment slowdown.
Sectoral Performance:
Manufacturing growth dropped significantly from 9.9% in 2023-24 to 5.3% in 2024-25, reflecting structural issues.
Gross Value Added (GVA) saw a smaller decline from 7.2% to 6.4%, indicating resilience in other sectors.
Factors Behind the Dip:
Government Investment:
Government capital expenditure in the first eight months of 2024-25 reached only 46.2% of the target.
Negative growth in government investment (-12.3%) has constrained overall GDP performance.
Global and Domestic Demand:
Uncertainty in global economic conditions, exacerbated by geopolitical factors, has limited export growth.
India’s reliance on domestic demand is a key driver, but private investment remains subdued.
Growth Prospects for 2025-26:
Stabilizing Investments:
Gross Fixed Capital Formation has stabilized around 33.4%, expected to remain constant in 2025-26.
A real GDP growth rate of 6.5% appears realistic, assuming an Incremental Capital Output Ratio (ICOR) of 5.1.
Government Strategy:
Accelerated capital expenditure growth of at least 20% is necessary to stimulate private investment.
Meeting capital expenditure targets could offset revenue constraints and sustain economic momentum.
Medium- to Long-Term Outlook:
Growth Potential:
India’s potential real GDP growth is estimated at 6.5% over the next five years (2025-26 to 2029-30).
Nominal GDP growth in the range of 10.5%-11%, coupled with a steady exchange rate, could enable India to achieve developed-country status in the next 25 years.
Challenges:
Sustaining high growth as the economic base expands will be difficult.
Achieving higher growth in initial years is critical for long-term development goals.
Implications:
Fiscal Policy:
Lower nominal GDP growth in 2024-25 could impact tax revenue collection, but buoyant tax growth may limit fiscal deficit pressures.
Investment Climate:
Government capital expenditures are crucial to crowd in private investment and boost productivity in key sectors like manufacturing.
Recommendations:
Policy Focus:
Prioritize accelerated government capital expenditure to stimulate domestic demand and private investment.
Design sectoral policies to address manufacturing sector challenges and reduce ICOR.
Structural Reforms:
Enhance ease of doing business and infrastructure development to attract private investment.
Diversify export markets and focus on value-added goods to reduce reliance on domestic demand.
Global Positioning:
Strengthen resilience against global uncertainties by fostering innovation and upskilling the workforce.
Conclusion:
India’s projected 6.4% growth rate in 2024-25 should be viewed in the context of a potential growth rate of 6.5%, reflecting resilience amid global challenges. While the deceleration from 8.2% in 2023-24 is concerning, it underscores the need for strategic policy interventions to sustain growth and foster long-term economic stability.
