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Decoding India’s Growth Slowdown
Context:
The National Statistics Office (NSO) recently released the first advance estimates of India’s GDP for 2024-25, signaling a decline in the real GDP growth rate to 6.4%, down from 8.2% in 2023-24.
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- This figure falls below the 6.5% to 7% growth range projected by the Economic Survey in July 2024.
- Nominal GDP growth is expected at 9.7%, significantly lower than the 10.5% forecast in the Union Budget.
Data Discrepancies and Methodological Challenges
- Economic Slowdown: The downward revision of GDP growth may still underestimate the extent of the economic slowdown.
- Flaws in Calculations: Experts and institutions, including the International Monetary Fund (IMF), have flagged flaws in India’s GDP calculations.
- The IMF’s 2023 consultation report highlighted several issues, such as the reliance on the Wholesale Price Index (WPI) as a deflator instead of the more accurate Producer Price Index (PPI), discrepancies between GDP by activity and expenditure, and the lack of seasonally adjusted quarterly GDP data.
- Volatility of WPI: The volatility of the WPI has caused significant inconsistencies in GDP estimates.
- For example, while nominal GDP growth dropped from 14.2% in 2022-23 to 9.6% in 2023-24, real GDP growth accelerated from 7% to 8.2%.
- This anomaly arose because the GDP deflator used was just 1.4%, contrasting with retail inflation at 5.4%, and a sharp drop in WPI inflation from 9.4% to -0.7%.
Private Investment and Economic Policy
- Corporate Investment: The Economic Survey 2023-24 lauded the 8.2% real GDP growth and pointed to a revival in private-sector investment.
- However, concerns remain about sluggish corporate investment in key areas like machinery and intellectual property.
- The Union Budget, emphasising private sector-led growth, announced the ₹2 trillion ‘Prime Minister’s Package for Employment and Skilling,’ expecting to generate massive job opportunities through increased private investment.
- Slowdown: Yet, the latest GDP estimates reveal a slowdown in real gross fixed capital formation, from 9% growth in 2023-24 to 6.4% in 2024-25.
- Corporate tax cuts introduced in 2019 have also failed to spur significant capital formation, primarily boosting corporate earnings and fueling a stock market bubble.
Fiscal Strains and Revenue Challenges
- Supply-Side Data: Supply-side data presents a sobering picture of India’s economic trajectory post-pandemic.
- GVA: Quarterly Gross Value Added (GVA) growth has been on a downward trend since 2023-24, with most sectors, including manufacturing, mining, and construction, showing signs of deceleration.
- Only public administration, defense, and allied services are expected to grow faster in 2024-25, underscoring the critical role of public spending in sustaining economic activity.
- Budgetary Targets: Budgetary targets are also under strain.
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- By November 2024, only 56% of the Centre’s ₹25.83 trillion net tax revenue target had been achieved, and less than half of the ₹11.11 trillion capital expenditure budget had been spent.
- While a surplus transfer of ₹2.11 trillion from the Reserve Bank of India provided some relief, the slowdown in revenue growth has disrupted fiscal plans.
- Fiscal Discipline: Adhering to the fiscal consolidation roadmap, which projects the fiscal deficit shrinking from 5.6% in 2023-24 to 4.5% by 2025-26, could exacerbate the economic slowdown.
- However, abandoning fiscal discipline is untenable due to high public debt and interest payment obligations.
Policy Recommendations
- Revenue Mobilisation: To navigate these challenges, a revised revenue mobilisation strategy is essential.
- Wealth and Corporate Tax: Enhancing taxation on wealth and corporate profits could provide resources to bolster capital expenditure and welfare programs.
- Public Spending: Strengthened public spending would be pivotal in addressing the slowdown and fostering sustainable growth.
India’s current economic slowdown demands a comprehensive reassessment of policies to balance fiscal discipline with strategic investments, enabling long-term economic stability and inclusive growth.
