Context

• The National Statistical Office (NSO) released its latest national accounts data on February 28, 2025, presenting crucial insights into India's economic growth.
• The report includes revised Gross Domestic Product (GDP) and Gross Value Added (GVA) estimates for the fiscal years 2022-23, 2023-24, and 2024-25, alongside third-quarter (Q3) GDP/GVA estimates for 2024-25.
• Amid these reports, it is important to examine the key trends, sectoral performances, annual revisions, and future growth prospects based on the data.

Third Quarter Growth and Sectoral Performance

• India's GDP growth in Q3 of 2024-25 was recorded at 6.2%, marking an improvement over the 5.6% growth in the second quarter.
• Sectoral analysis highlights notable disparities.
• Agriculture experienced robust growth of 5.6%, reinforcing its resilience in the economy.
• Manufacturing, while improving slightly from 2.1% in Q2 to 3.5% in Q3, remains sluggish.
• The services sector, particularly trade, hospitality, and related industries, demonstrated an upward trend, with growth increasing from 6.1% in Q2 to 6.7% in Q3.

Concerns Regarding Quarterly Data

• A key question arising from the quarterly data is the sharp drop in Q2 growth to 5.6% and the feasibility of achieving an estimated 7.6% growth in Q4.
• The primary driver behind the Q2 decline was the slowdown in Private Final Consumption Expenditure (PFCE), whose contribution fell from 4.3 to 3.3 percentage points.
• Achieving the projected Q4 growth requires PFCE growth of 9.9%, a level not witnessed in recent years.
• Similarly, investment contributions also fluctuated, falling from 2.3 percentage points in Q1 to 1.8 in Q3, which contributed to slower GDP growth.

Challenges to Fourth Quarter Growth Projections and Annual GDP Revisions and Sectoral Adjustments

• Challenges to Fourth Quarter Growth Projections
  • A crucial factor influencing Q4 growth will be government investment.
  • The Controller General of Accounts (CGA) reported that as of January 2025, the Government of India had incurred ₹7.57 lakh crore in capital expenditure.
  • To meet the revised estimate of ₹10.18 lakh crore, an additional ₹2.61 lakh crore must be spent in the final two months of the fiscal year.
  • However, historical trends suggest that average government expenditure in February and March has been only ₹1.81 lakh crore, raising doubts about meeting the required investment target.
  • If capital expenditure falls short, the 7.6% Q4 growth projection may not be achieved, leading to a potential downward revision of the full-year growth estimate of 6.5%.
• Annual GDP Revisions and Sectoral Adjustments
  • The revised annual GDP data indicate an upward revision in both real and nominal growth rates:
    • Real GDP growth for 2022-23, 2023-24, and 2024-25 is now estimated at 7.6%, 9.2%, and 6.5%, respectively.
    • The revision in 2023-24 growth from 8.2% to 9.2% and in GVA growth from 7.2% to 8.6% was primarily driven by manufacturing and financial services, which saw upward revisions of 2.4 and 1.9 percentage points, respectively.
  • However, the sharp decline in 2024-25 growth compared to 2023-24 (a drop of 2.7 percentage points) is primarily due to a slowdown in gross capital formation from 10.5% to 5.8%.
  • This reflects a reduction in investment activity, which is critical for sustaining long-term economic expansion.
  • The revised GDP data also impact the Incremental Capital-Output Ratio (ICOR), which measures investment efficiency.
  • The ICOR for 2022-23, 2023-24, and 2024-25 is estimated at 4.8, 4.0, and 5.5, respectively.
  • The decline in 2023-24 indicated better capital efficiency, but the 2024-25 increase suggests a return to less efficient capital utilisation.

Future Economic Prospects: 2025-26 and Beyond

• The nominal GDP growth projections for 2025-26 suggest a potentially higher growth rate than the Budget assumption of 10.1%.
• The Economic Survey estimates a real GDP growth range of 6.3%-6.8%, with a mid-point of 6.55%.
• Achieving this requires strong government investment, as private investment is still recovering amid global uncertainties.
• A key area of debate is whether private consumption should drive growth.
• Some argue that increasing the PFCE-to-GDP ratio would boost demand and accelerate growth.
• However, this would simultaneously lead to a decline in investment demand, potentially undermining long-term growth sustainability.
• In 2023-24, the overall nominal saving rate was 30.7%, below the pre-COVID average of 31.2% (2015-16 to 2019-20).
• Thus, increasing savings and investment rates should be a priority for sustaining medium-term growth.
• The real investment rate (Gross Fixed Capital Formation to GDP) for 2024-25 is estimated at 33.4%, which, with an ICOR of 5.1, yields a potential growth rate of 6.5%. Therefore, investment-led growth remains the best long-term strategy for India. 

The Way Forward

• Looking ahead, 2025-26 growth prospects appear stable at around 6.5%, contingent on robust government investment and gradual recovery in private investment.
• The long-term strategy should focus on enhancing savings and investment rates, ensuring that India maintains its growth momentum amidst global economic uncertainties.

Conclusion

• India’s GDP growth trajectory in 2024-25 reflects both strengths and challenges. While Q3 growth of 6.2% showed improvement, achieving the projected 7.6% growth in Q4 remains uncertain due to potential shortfalls in government investment spending.
• Annual GDP revisions highlight strong past performance, particularly in 2023-24, but a significant slowdown in 2024-25 raises concerns.