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The recent First Advance Estimates (FAEs) released by the Ministry of Statistics and Programme Implementation (MoSPI) paint a nuanced picture of India's economic health. While the nominal GDP is projected to reach a significant Rs 324 lakh crore, representing a 9.7 percent growth, a deeper analysis reveals a deceleration in the rate of growth. This is a crucial distinction: the economy is still expanding, but at a slower pace than previously observed. The nominal GDP figure, while impressive in absolute terms, falls short of the budget estimates, highlighting a gap between projections and reality. Converting this to USD, India's GDP for FY25 is estimated at $3.8 trillion, significantly lower than the potential $5.3 trillion had the rupee's exchange rate remained stable since 2014. This underscores the impact of external factors on the perceived economic strength.
The real GDP, adjusted for inflation, provides a more accurate reflection of the economy's productive capacity. At Rs 184.9 lakh crore, representing only 57% of the nominal GDP, it emphasizes the significant contribution of inflation to the nominal growth figures. The real GDP growth rate, while positive, shows a clear deceleration compared to previous years. The compounded annual growth rate (CAGR) of real GDP since FY20 stands at a mere 4.8%, a stark contrast to the almost 7% average annual growth experienced since the 1991 economic reforms. This significant drop in growth warrants a careful examination of underlying factors.
To understand the reasons behind this slowdown, it's essential to analyze the four key components driving GDP growth: Private Final Consumption Expenditure (PFCE), Government Final Consumption Expenditure (GFCE), Gross Fixed Capital Formation (GFCF), and Net Exports. PFCE, representing nearly 60% of India's GDP and reflecting personal spending, shows a growth rate of 7.3% for the current year but a concerning CAGR of only 4.8% since FY20. This sluggish growth in private consumption is a major cause for concern, as it directly impacts investor confidence and future investments. The government's spending, represented by GFCE, has also shown weak growth, barely exceeding 4.2% in the current year and averaging a meager 3.1% since 2019. This lack of robust government spending, despite the expectation of counter-cyclical fiscal stimulus during economic downturns, contributes to the overall slowdown.
Gross Fixed Capital Formation (GFCF), encompassing investments in productive capacity, is another key indicator. While projected to rise by 6.3% in the current year, the CAGR since FY20 is only 5.3%. This points to a lack of investment in infrastructure and expansion by private businesses, likely influenced by the weak private consumption demand. The hesitancy of businesses to invest in new capacity reinforces the cyclical nature of the economic slowdown. Finally, net exports, typically negative for India, have shown reduced negative growth, indicating a slight improvement in the trade balance. However, this factor alone cannot offset the weaknesses in the other key components.
The analysis indicates that India's post-pandemic growth figures, while seemingly impressive, might be partly an illusion created by the low base effect of the 2020-21 GDP contraction. Considering a longer timeframe, including the pre-pandemic year, reveals a real GDP growth rate of less than 5% annually. This is far below the rate required to achieve the goal of becoming a developed nation by 2047. The article concludes by emphasizing the need for policymakers to address the underlying issues driving the deceleration, particularly the weak private consumption and inadequate government spending, which are crucial to reviving robust economic growth. The call to action encourages readers to share their views and queries, suggesting a potential for further discussion and policy recommendations.
The overall picture painted by the FAEs is one of a slowing economy, requiring a concerted effort from the government and private sector to boost consumption, encourage investment, and create sustainable long-term growth. The underwhelming performance in government spending, a key tool for economic stimulation, is especially concerning. The challenge lies in crafting effective policies that can reignite private consumption while also boosting investment in productive capacity. The success of future economic growth hinges on addressing these fundamental challenges.
Source: ExplainSpeaking: What the latest GDP estimates tell about the state of India’s economy