Why in the News?

• India posted a robust 8.2% GDP growth, supported by strong manufacturing and services activity.
• However, the IMF assigned India a ‘Grade C’ in national income accounting, highlighting structural weaknesses and statistical gaps.

What’s in Today’s Article?

• GDP Growth (Current performance, Macroeconomic Stability Indicators, IMF’s Assessment, Structural Vulnerabilities)

Current Growth Performance

• India’s economic output for the quarter reached 48.63 lakh crore, significantly higher than the previous year. The broad-based expansion shows that the current momentum goes beyond a mere post-pandemic rebound.

• Manufacturing grew 9.1%, indicating stronger industrial demand and higher capacity utilisation.
• Services expanded 9.2%, now forming 60% of GDP, with financial services at 10.2%, signalling buoyant credit growth and high transaction volumes.
• Agriculture, supported by improved reservoir levels and horticulture output, rose 3.5%, showing a slight improvement in rural incomes.
• Real GVA rose from Rs. 82.88 lakh crore to Rs. 89.41 lakh crore, confirming real value creation rather than price effects.

• Crucially, nominal GDP grew only 8.8%, showing that inflation, previously a major concern, remained under control through 2024-25.
• Household consumption grew 7.9%, reflecting resilient domestic demand.

Macroeconomic Stability Indicators

• Several macro indicators underline India’s economic resilience:

• Inflation eased, dipping even below target toward the end of 2024-25.
• Bank credit growth remained strong, with well-capitalised banks holding buffers above regulatory norms.
• Fiscal consolidation continued, supported by buoyant GST and direct tax revenues.
• The current account deficit remained modest, helped by strong services exports and diversified forex reserves.

• These signals collectively suggest that India continues to grow even as global economic activity weakens.

IMF's Grade C Assessment: What It Means

• Despite India’s strong growth numbers, the IMF assigned India a ‘Grade C’ for its national income accounting framework.
• This rating does not evaluate the GDP growth rate itself but the statistical system supporting it. Key shortcomings highlighted:
  • Use of an outdated base year (2011-12).
  • Dependence on the Wholesale Price Index (WPI) due to the absence of Producer Price Index (PPI) deflators.
  • Single deflation method, which introduces cyclical bias.
  • Significant gaps between production and expenditure data, indicating incomplete coverage of the informal sector and expenditure components.
  • Lack of seasonally adjusted data in quarterly accounts.
  • No consolidated datasets for States and local bodies after 2019.
• The IMF’s view suggests that India’s “statistical backbone” needs strengthening to match its economic muscle.

Uneven Recovery Across Sectors

• Despite strong headline numbers, the growth pattern shows unevenness:
  • Mining grew barely 0.04%, due to prolonged monsoon disruptions.
  • Electricity and utilities grew only 4.4%, affected by a mild winter, reducing peak load demand.
• These sectors are foundational for industrial growth. Their sluggish performance indicates that the recovery has not spread uniformly across the real economy.
• The sectoral contribution to GVA stands at: Primary: 14%, Secondary: 26%, Tertiary: 60%
• This structure mirrors a service-driven economy, but India’s employment profile still remains heavily tilted toward low-productivity agriculture and informal services.

Structural Vulnerabilities

• India’s long-term challenges, highlighted both by the RBI and IMF, include:
• Weak Export Competitiveness
  • Trade protectionism, tariff uncertainty, and global geopolitical tensions threaten India's export growth. Structural scaling of goods exports remains limited.
• Labour Productivity Issues
  • A mismatch exists between India’s output structure and its employment structure. A large share of the workforce remains in low-productivity sectors.
• Fragile Statistical and Institutional Capacity
  • The absence of updated base years, comprehensive data, and modern statistical tools weakens policy evaluation.
• External Pressures on the Rupee
  • Although seemingly stable, the rupee continued to face downward pressure due to a strong U.S. dollar and fluctuating foreign capital flows.
• These issues do not negate India’s growth achievement but underscore the need for deeper institutional reforms to sustain high growth over time.