Why in News?

India's real Gross Domestic Product (GDP) is projected to grow at 6.4% in the financial year 2024-25 (FY25), marking a four-year low.

This slowdown is attributed to weak industrial and investment growth, according to the National Statistics Office (NSO).

The forecast is below the Reserve Bank of India's (6.6%) and the government's estimate (6.5-7%) for the same period.

What’s in Today’s Article?

• Some Key Economic Concepts
• GDP Projections for FY25
• Other Economic Indicators for FY25
• Challenges for Sustained Growth
• Implications of GDP Forecast and Way Forward
• Conclusion

Some Key Economic Concepts:

• Gross Domestic Product (GDP): It is defined as the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
  • It measures the value of total output in the economy by tracking the total demand.
• GDP = C + I + G + NX
  • Consumption (C): The biggest engine (56% of all GDP) is consumption demand from private individuals, technically known as Private Final Consumption Expenditure (PFCE).
  • Investment (I): The second-biggest engine (32%) is the investment demand generated by private sector businesses, also known as Gross Fixed Capital Formation (GFCF).
  • Government (G): The third engine (11%) is the demand for goods and services generated by the government and is known as the Government Final Consumption Expenditure (GFCE).
  • Net Exports (NX): This is calculated by subtracting Indian imports from the Indian exports.
• Nominal vs Real GDP:
  • Nominal GDP (GDP calculated using current market prices) is the actual observed variable. However, Real GDP (GDP calculated using constant 2011-12 prices, after taking away the effect of inflation) is a derived metric.
  • Real GDP = Nominal GDP - Inflation Rate. Inflation is the rate at which the value of a currency is falling and consequently the general level of prices for goods and services is rising.
  • From the Budget-making perspective, nominal GDP is important. However, from the perspective of the common people, real GDP is what matters.
• Gross Value Added (GVA): It examines the amount of value added (in monetary terms) in various productive areas of the economy. It tracks the total output in the economy by looking at the total supply.
• GDP vs GVA:
  • GDP = (GVA) + (Taxes earned by the government) - (Subsidies provided by the government). The difference between these two absolute figures will reveal the government's role in the process.
  • For example,
    • GDP > GVA, if the government generated more money from taxes than it spent on subsidies.
    • GVA > GDP, if the government gave subsidies in excess of its tax collections.
• Fiscal deficit:
  • A fiscal deficit is a shortfall in a government's income compared with its spending.
  • It is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.

GDP Projections for FY25:

• Nominal vs. Real GDP:
  • Nominal GDP: Expected at ₹324 lakh crore (9.7% growth), translating to $3.8 trillion at an exchange rate of ₹85 per USD.
  • Real GDP: Estimated at ₹184.9 lakh crore, 57% of nominal GDP, accounting for inflation effects.
• Factors behind the sluggish growth: (Economic slowdown drivers)
  • Cyclical slowdown: Indian economy faces a downturn in growth momentum over the past three quarters.
  • Key influences:
    • Strong base effect.
    • Impact of general elections.
    • Weak private sector capital expenditure (capex).
    • Monetary and fiscal tightening measures.

Other Economic Indicators for FY25:

• Sectoral performance:
  • Primary and secondary sectors:
    • Agriculture: GVA growth rises to 3.8% in FY25 (1.4% in FY24).
    • Manufacturing: GVA growth dips to 5.3% from 9.9% in FY24.
    • Electricity, gas, and utilities: Growth slows to 6.8% (7.5% in FY24).
    • Construction: Grows at 8.6% (9.9% in FY24).
    • Mining and quarrying: Grows at 2.9%, down from 7.1% in FY24.
  • Services: Estimated growth at 7.2%, led by public administration (9.1%).
    • Trade, hotels, and transport: Growth slows to 5.8% (6.4% in FY24).
    • Financial and professional services: Grows at 7.3% (8.4% in FY24).
  • Consumption and investment trends:
    • Private Final Consumption Expenditure (PFCE): Expected to grow at 7.3% (4% in FY24).
    • Gross Fixed Capital Formation (GFCF): Growth moderates to 6.4% from 9.0% in FY24.
  • Government spending and fiscal impact:
    • Government Final Consumption Expenditure (GFCE) growth rises to 4.1% in FY25 from 2.5% in FY24.
    • Lower nominal GDP growth (9.7%) compared to budget estimates may not significantly impact fiscal deficit targets.

Challenges for Sustained Growth: Key engines of GDP showing sluggish growth.

• Private consumption: Slow CAGR of 4.8% since FY20 hinders growth.
• Government spending: Limited fiscal expansion since 2019 (CAGR of 3.1%).
• Investments: Stagnation in private and public sector capex since 2014 (CAGR of 5.3%).
• Net exports: Persistent trade deficit, although narrowing in FY25.

Implications and Way Forward:

• Insights for policymakers:
  • The latest GDP data underscores a deceleration in economic growth.
  • While India has shown high growth rates post-pandemic, much of this was due to statistical base effects.
  • A closer look at long-term trends reveals real economic growth of less than 5% annually since FY20, far below the 7% average required to achieve developed country status by 2047.
• Strategic interventions needed:
  • Boost private consumption to encourage investments.
  • Enhance public sector capex to revitalize economic growth.
  • Leverage rural demand and improve urban wage growth.

Conclusion:

• India's GDP growth trajectory in FY25 highlights pressing structural challenges.
• While government spending and rural demand offer some support, a holistic approach addressing consumption, investments, and trade is critical to sustaining long-term growth.