India’s Economic Growth
Context:
The latest national accounts data released by the National Statistical Office (NSO) on February 28, 2025, provide crucial insights into India’s economic performance.
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- These include revised annual Gross Domestic Product (GDP) and Gross Value Added (GVA) estimates for 2022-23, 2023-24, and 2024-25, as well as third-quarter GDP and GVA figures alongside the second advance estimates for 2024-25.
Third Quarter Growth and Sectoral Performance
- Improvement: India’s GDP grew by 6.2% in the third quarter of 2024-25, an improvement from the second quarter’s 5.6%.
- Sectors: Agriculture led the way with a robust growth rate of 5.6%, while manufacturing saw a modest recovery at 3.5%, up from 2.1% in the previous quarter.
- The services sector, particularly trade and hospitality, also showed better performance, growing by 6.7% compared to 6.1% in the second quarter.
- Concerns: A key concern is the sharp drop in GDP growth in the second quarter, which fell from 6.5% in Q1 to 5.6% in Q2.
- The primary driver behind this decline was reduced private final consumption expenditure (PFCE), which contributed only 3.3 percentage points to GDP growth, down from 4.3 in Q1.
- Investments: Investment also played a significant role in the third-quarter slowdown. Its contribution to GDP growth dropped to 1.8 percentage points from 2.0 in Q2.
- The Controller General of Accounts (CGA) reported that the government had spent ₹7.57 lakh crore in capital expenditure by January 2025, leaving ₹2.61 lakh crore to be spent in the final two months.
- Given that past February-March expenditure has averaged ₹1.81 lakh crore, a shortfall could jeopardise the 7.6% GDP growth estimate, potentially leading to a downward revision of the full-year 6.5% growth projection.
Annual Data Revisions
- Upward Adjustments: The revised annual GDP estimates indicate upward adjustments in real and nominal growth rates.
- Real GDP growth for 2022-23, 2023-24, and 2024-25 has been revised to 7.6%, 9.2%, and 6.5%, respectively.
- The most significant revision occurred in 2023-24, where GDP growth was increased from 8.2% to 9.2%, and GVA growth was raised from 7.2% to 8.6%.
- Sectoral Adjustments: Sectoral adjustments show the largest upward revisions in manufacturing (2.4 percentage points) and financial and real estate services (1.9 percentage points).
- However, the transition from 2023-24 to 2024-25 has seen a notable decline in growth, primarily due to lower gross capital formation, which dropped from 10.5% to 5.8%.
- ICOR: The revisions also affect the Incremental Capital-Output Ratio (ICOR), a key measure of investment efficiency.
- ICOR values for 2022-23, 2023-24, and 2024-25 stand at 4.8, 4.0, and 5.5, respectively, with an average of 5.1. Large revisions in ICOR complicate economic policy planning and decision-making.
The Incremental Capital-Output Ratio (ICOR) is a key economic metric used to assess the efficiency of capital investments in generating output. It measures the additional capital required to produce an additional unit of output, typically expressed as the ratio of investment to growth. A lower ICOR indicates that an economy is more efficient in using capital to generate output. Conversely, a higher ICOR suggests inefficiency, as more capital is required to achieve the same level of output growth.
Outlook for 2025-26 and Medium-Term Growth
- Higher than Expected: Upward revisions in nominal growth rates suggest a higher-than-expected nominal GDP growth of 14%, 12%, and 9.9% for 2022-23, 2023-24, and 2024-25, respectively.
- Balance: A key consideration in India’s growth strategy is the balance between consumption and investment.
- While increasing the PFCE-to-GDP ratio could boost growth, it would also reduce investment demand, which is critical for long-term expansion.
- Savings and Investments: India’s medium-term strategy should focus on increasing savings and investment rates.
- The real investment rate, measured by the gross fixed capital formation (GFCF) to GDP ratio, is projected at 33.4% for 2024-25. Given an ICOR of 5.1, this translates into a potential growth rate of 6.5%, reinforcing the viability of an investment-led growth strategy over the long term.
Gross Fixed Capital Formation (GFCF) is the total value of a producer’s acquisitions, minus disposals, of fixed assets during a given period. It also includes certain additions to the value of non-produced assets realised by producers or institutional units.
India’s economic trajectory continues to be shaped by a complex interplay of consumption, investment, and global economic conditions. While recent data revisions indicate stronger-than-expected growth in prior years, sustaining momentum will require focused efforts on boosting investment and savings. As the country navigates global uncertainties, an investment-driven approach remains the most viable path for long-term sustainable growth.
