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India's economic growth has experienced a significant deceleration, dropping to 6.4% in 2024-25 from 8.2% the previous year. This decline, lower than projected, raises concerns about the accuracy of official GDP estimates. The National Statistics Office's (NSO) methodology, particularly its reliance on the volatile Wholesale Price Index (WPI) as a deflator, has been criticized by experts, including the International Monetary Fund (IMF). The IMF highlights inconsistencies and methodological flaws that complicate accurate economic trend analysis, especially concerning demand-side indicators. The use of WPI, exhibiting high volatility and significant discrepancies with the Consumer Price Index (CPI), leads to unreliable real GDP estimations. This is evident in the discrepancy between nominal GDP growth deceleration and reported real GDP growth acceleration in 2023-24, a clear anomaly indicating potential inaccuracies in the data.
The article further examines the elusive nature of private investment, a cornerstone of the government's economic strategy. Despite projected growth and the implementation of corporate tax cuts in 2019, private investment remains sluggish. The Economic Survey, while initially optimistic, later acknowledged concerns about weak corporate investments in machinery, equipment, and intellectual property, highlighting an unhealthy overreliance on investments in buildings and structures. The government's 'Prime Minister's Package for Employment and Skilling,' predicated on a revival of private corporate investment, now faces uncertainty in light of the reduced investment growth from 9% to 6.4%. A longer-term analysis comparing the United Progressive Alliance (UPA) and National Democratic Alliance (NDA) governments reveals that investment-led growth during UPA years contrasted with consumption-led growth under NDA, highlighting a fundamental difference in the economic growth engine. The post-pandemic recovery, although initially fueled by private investment, is attributed largely to base effects, rather than a sustained structural change. Therefore, the lack of a significant structural break in investment behaviour after eleven years under the NDA government calls into question the effectiveness of current economic policies.
Fiscal constraints further complicate the situation. The slowdown has negatively impacted tax revenue, jeopardizing the government's fiscal consolidation roadmap. While the government received a windfall from the Reserve Bank of India, tax revenue collection remains below targets, leading to reduced capital expenditure. This underscores the crucial role of public spending in sustaining growth, creating a difficult dilemma for the government. Maintaining fiscal rectitude, given high public debt and interest payments, poses challenges. However, abandoning fiscal discipline is also impractical. The article suggests that the solution may lie in a revised revenue mobilization strategy, focusing on wealth and profit taxation to support capital expenditure and welfare programs. The article concludes by emphasizing the limitations of business-friendly policies in achieving broader structural changes and inclusive prosperity, hinting at a need for deeper systemic reforms rather than relying solely on tax cuts or investment-focused initiatives.
In essence, the article presents a critical analysis of India's current economic slowdown, emphasizing the need for addressing data accuracy issues, boosting private investment, and revising fiscal policies. The authors caution against overly optimistic projections based on potentially flawed data and suggest that a more nuanced approach, involving careful examination of the broader economic landscape, including supply-side factors and fiscal realities, is essential for sustainable and inclusive economic growth. The situation necessitates a reassessment of both economic policy and data gathering methodologies to effectively address the challenges facing the Indian economy and guide policy decisions for improved and reliable economic outcomes. The reliance on public spending as a growth engine, while temporarily effective, may prove unsustainable in the long term if not supported by robust private sector involvement. This signals the need for broader structural reforms to foster a more vibrant and resilient economy capable of sustained growth and genuine inclusivity.
The current situation highlights a need for significant policy adjustments. Addressing data quality issues is paramount, requiring improvements in the methodology for GDP calculation to better reflect the actual economic performance. The government needs to develop effective strategies for stimulating private investment, going beyond mere tax cuts and addressing the underlying reasons for the persistent lackluster performance of the private sector. This could involve targeted investments in infrastructure, regulatory reforms to foster competition, and initiatives to improve ease of doing business. Simultaneously, the government must find a sustainable approach to fiscal management, balancing the need for fiscal discipline with the imperative to continue public investments in crucial sectors like infrastructure and social welfare programs. Ultimately, resolving India's economic challenges requires a holistic approach involving improvements in data accuracy, effective strategies to attract private investment, and a carefully planned fiscal policy that fosters sustainable and inclusive economic growth.
Source: Decoding India’s growth slowdown