What’s in Today’s Article?

• Current Growth Scenario (Decline, Discrepancies, Challenges, Sectoral Analysis, Fiscal Strains, Policy Recommendations, etc.)

Current Growth Scenario:

• Decline in Growth Rate:
• The National Statistics Office (NSO) has estimated India’s real GDP growth rate at 6.4% for 2024-25, down from 8.2% in 2023-24.
• This figure is below the 6.5-7% projection made in the Economic Survey 2023-24 and lower than the 10.5% nominal GDP growth estimate in the Union Budget.
• Data Discrepancies:
• Economists and institutions like the IMF have raised concerns over the use of the Wholesale Price Index (WPI) as a deflator in GDP estimates.
• Significant divergence between WPI and Consumer Price Index (CPI) rates has led to inconsistencies in nominal and real GDP calculations.

Challenges in Private Investment:

• Sluggish Corporate Investments:
• Despite corporate tax cuts in 2019, private investments in key sectors like machinery and intellectual property remain weak.
• The majority of private investments are skewed towards "dwellings, other buildings, and structures," reflecting an unhealthy mix.
• Comparison with the growth during 2004-2014:
• During 2004-2014, real private investment grew at 10% annually, outpacing public investment (9%).
• During 2014-present, private investment growth slowed to 6.3%, slightly below public investment growth (6.6%).
• Post-Pandemic Recovery:
• While private investment rebounded in 2021-22 due to a base effect, sustained structural changes in private sector behaviour have been elusive.

Sectoral Analysis:

• Divergent Performance:
• Manufacturing: Showed double-digit growth in early 2023-24 but has since slowed down.
• Mining, Power, and Construction: Experiencing significant slowdowns.
• Services: Sectors like retail trade, transport, finance, and real estate show deceleration.
• Public Administration and Defence: The only sector projected to grow faster in 2024-25, underscoring the role of public spending.

Fiscal Strains:

• Revenue Shortfalls:
• As of November 2024, only 56% of net tax revenue targets for 2024-25 have been achieved, while non-tax revenues reached 78% due to a surplus transfer from the RBI.
• Impact on Expenditure:
• By November 2024, less than half of the ₹11.11 trillion capex target had been spent, disrupting public investment plans.
• Fiscal Consolidation Dilemma:
• Adhering to fiscal discipline may reduce public spending, further aggravating the slowdown.
• However, abandoning fiscal consolidation risks worsening public debt and interest burdens.

Policy Recommendations:

• Revenue Mobilization:
• Rework taxation policies to increase taxes on wealth and profits, enabling higher public spending on infrastructure and welfare programs.
• Encourage Private Investment:
• Strengthen incentives for private sector investments in productive assets, particularly in manufacturing and intellectual property.
• Enhance Public Spending:
• Focus on capital expenditure in sectors like infrastructure and renewable energy to stimulate economic growth.
• Data and Statistical Reforms:
• Replace the WPI-based deflator with the Producer Price Index (PPI) for more accurate GDP estimates.
• Ensure regular updates to GDP methodologies to reflect real-time economic changes.

Long-Term Considerations:

• Structural Reforms:
• Introduce policies to improve ease of doing business and reduce bureaucratic delays in project approvals.
• Enhance credit access for small and medium enterprises (SMEs) to stimulate broad-based economic growth.
• Global Integration:
• Boost exports through trade agreements and incentivize manufacturing under programs like PLI (Production Linked Incentive).
• Focus on Consumption:
• Strengthen rural demand through direct income support and employment generation schemes like MGNREGA.

Conclusion:

• India’s economic growth faces challenges from inconsistent private investments, sectoral slowdowns, and fiscal pressures.
• To overcome these hurdles, a balanced approach combining enhanced revenue mobilization, targeted public spending, and robust private sector incentives is essential.
• Addressing statistical discrepancies and adopting long-term structural reforms can pave the way for sustainable economic growth.