Context

• The First Advance Estimates (FAE) of National Accounts for 2024-25 indicate a real GDP growth rate of 6.4% and a nominal GDP growth rate of 9.7%.
• These figures, while significant, fall short of the RBI December 2024 revised growth estimates of 6.6% for real GDP and 10.5% for nominal GDP as projected in the Union Budget of 2024-25.
• The deviation highlights emerging challenges in sustaining robust economic growth in India, compounded by both domestic and international factors.

Analysis of the 2024-25 Economic Performance and Reason Behind the Dip

• The annual GDP growth rate of 6.4% during 2024-25 reflects an improving trend within the fiscal year, with growth accelerating from 6% in the first half to 6.7% in the second half.
• This demonstrates recovery from the lowest point (5.4%) during the second quarter (Q2) of the fiscal year 2024-25.
• However, the decline from the 8.2% growth achieved in 2023-24 underscores the transient nature of the previous year’s performance.
• The manufacturing sector, in particular, experienced a sharp slowdown, with growth dipping from 9.9% in 2023-24 to 5.3% in 2024-25, a key factor contributing to the lower overall Gross Value Added (GVA).
• Government investment trends also play a crucial role in this scenario.
• Capital expenditure growth by the Government of India has been subdued, with only 46.2% of the ₹11.1 lakh crore Budget target achieved by the end of the first eight months of 2024-25.
• Despite potential acceleration in the final months, the shortfall in government spending has directly affected overall growth.

Prospects for Growth in 2025-26

• The Role of Investment
  • Investment activity, reflected in the Gross Fixed Capital Formation (GFCF) rate, has shown consistent stabilisation around 33.4% over the past few years.
  • This stability provides a solid foundation for economic growth, indicating sustained capital deployment in productive activities.
  • Maintaining this level of investment in 2025-26 will be critical, particularly as India aspires to bridge its infrastructure deficit and boost industrial capacity.
  • Public sector capital expenditure is a pivotal driver of investment activity.
  • To catalyse private investment, the government will need to adopt an aggressive approach to infrastructure spending, ensuring an annual growth rate of at least 20% in capital expenditure based on the revised estimates for 2024-25.
  • This strategy can create a multiplier effect, increasing private sector participation, enhancing productivity, and generating employment.
• Private Investment and Domestic Demand
  • The alignment of government policies with the needs of the private sector will play a critical role in improving investment.
  • By creating a favourable environment through regulatory reforms, fiscal incentives, and robust public-private partnerships (PPPs), India can attract more private capital into infrastructure, manufacturing, and technology.
  • Additionally, sustained domestic demand, driven by rising income levels and urbanisation, will ensure that private investments yield substantial returns.
• The Role of Incremental Capital Output Ratio (ICOR)
  • India’s average ICOR, a measure of investment efficiency, has remained slightly above 5 in recent years.
  • This suggests that every ₹5.1 of investment generates ₹1 of GDP. To achieve a 6.5% growth rate in 2025-26, the current ICOR must be maintained or improved.
  • Lowering ICOR through enhanced productivity and innovation will be crucial in maximising the returns on both public and private investments.
• Global Economic Uncertainty
  • External factors, including geopolitical shifts and global economic conditions, will significantly influence India’s growth trajectory.
  • The uncertainty surrounding global trade and financial flows, exacerbated by Donald Trump’s return to office and potential shifts in U.S. foreign policy, may create challenges for India’s export-driven industries.
  • However, India’s relatively low dependence on external demand and a large domestic market provide a cushion against global shocks.
• Fiscal Policy and Revenue Mobilisation
  • A critical aspect of the growth strategy for 2025-26 is ensuring fiscal discipline while sustaining high levels of capital expenditure.
  • The Government of India’s ability to achieve its capital expenditure targets will depend on effective revenue mobilisation.
  • In 2024-25, despite nominal GDP growth falling short of the budgeted 10.5%, tax revenue growth has shown resilience, with a realised buoyancy of about 1.1.
  • This trend, if sustained, will ensure minimal revenue shortfalls, enabling the government to maintain its focus on developmental expenditure without exacerbating fiscal deficits.
• Boosting Productivity through Reforms
  • Structural reforms in critical sectors, including agriculture, labour markets, and financial systems, will play a decisive role in ensuring sustained growth.
  • For example, modernising agriculture through technology and market reforms can unlock higher productivity.
  • Similarly, labour reforms can facilitate greater workforce participation and skill development, contributing to a more competitive manufacturing sector.
• Energy and Sustainability
  • India’s transition to renewable energy and its commitment to sustainability also hold significant growth potential.
  • Investment in green infrastructure, solar and wind energy, and electric vehicles (EVs) can create new economic opportunities while reducing reliance on fossil fuels.
  • This alignment with global sustainability goals will not only attract foreign investment but also position India as a leader in the global energy transition.
• Sectoral Growth Dynamics
  • Key sectors such as manufacturing, services, and construction will be instrumental in achieving the targeted growth rate.
  • Revitalising manufacturing through initiatives like Make in India and focusing on innovation in technology-driven sectors can enhance productivity.
  • Meanwhile, the service sector, particularly IT, financial services, and tourism, is expected to remain a significant contributor to GDP growth, supported by digitalization and global outsourcing opportunities.

Evaluations of the Current Growth Rate in the Context of Long-Term Growth Projections

• Long-Term Growth Projections
  • Over the next five years, India’s potential GDP growth rate is estimated at 6.5%, aligning with the International Monetary Fund’s (IMF) projections for the Indian economy from 2025-26 to 2029-30.
  • Nominal GDP growth during this period is expected to range between 10.5% and 11%, driven by an implicit price deflator (IPD)-based inflation of about 4%.
  • In favourable global conditions, real GDP growth could rise to 7%, particularly if net exports make a significant contribution.
  • Achieving this growth trajectory would position India for developed country status within the next two and a half decades.
  • However, maintaining consistent growth will become increasingly challenging as the economic base expands.
  • Early years will demand higher growth rates to lay the foundation for sustained performance.
• Evaluating the Current Growth Rate
  • In this context, the 6.4% growth rate for 2024-25 should not be viewed as disappointing. Instead, it reflects the economy's alignment with its potential growth trajectory.
  • The remarkable 8.2% growth in 2023-24 can be seen as an anomaly, fuelled by post-pandemic recovery and other transient factors.
  • The 2024-25 performance, while modest, underscores the need for strategic planning to capitalise on domestic demand and enhance productivity.

Conclusion

• India’s growth story is marked by a delicate balance between aspiration and realism.
• The 6.4% growth in 2024-25 signals a return to a more sustainable trajectory, with future growth heavily reliant on proactive government policies, strategic investments, and private sector participation.
• In the medium term, a focus on structural reforms and capital investment will be vital to achieve and sustain the 6.5% potential growth rate.
• While challenges remain, the steady alignment with long-term growth potential sets a promising foundation for India’s economic ambitions.