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India's economic growth trajectory is poised for a period of transition, marked by a projected slowdown in the short term followed by a gradual recovery. The National Statistics Office (NSO) has released the First Advance Estimates, predicting a deceleration of India's Gross Domestic Product (GDP) growth to 6.4% in the fiscal year 2024-25, a notable drop from the 8.2% recorded in 2023-24. This four-year low, while anticipated, underscores the complexities faced by the Indian economy. The NSO's projection also suggests a more optimistic outlook for the second half of the year, forecasting an uptick to 6.7% growth. This anticipated improvement is attributed to a broad-based recovery across key sectors including agriculture, industry, and services. However, this projection hinges on several factors, including the alleviation of monsoon-related disruptions experienced earlier in the year. A stronger rural demand and renewed government and private investment post the national elections are also crucial contributors to this anticipated growth.
While the NSO's projections indicate a moderate recovery, other analyses paint a slightly different picture. ICRA, for example, offers a forecast of 6.5% GDP growth for the entire year, slightly higher than the NSO's estimate. ICRA anticipates even more robust growth in the second half of the fiscal year, projecting 6.9% expansion, driven mainly by improvements in sectors such as mining, manufacturing, trade, hotels, transport, communication, and broadcasting. The anticipated increase in gross fixed capital formation will further propel this growth. Moreover, the dissipation of monsoon-related disruptions, the expected boost in rural demand and anticipated increase in government and private capital expenditure following the slowdown in the first half are crucial factors contributing to this optimistic outlook. The discrepancies between the different forecasts highlight the inherent uncertainties and challenges in economic forecasting, particularly when dealing with a dynamic economy influenced by multiple internal and external factors.
A closer examination of the NSO's First Advance Estimates reveals some intriguing patterns, especially concerning the expenditure side of the equation. Private final consumption expenditure is expected to accelerate to 7.8% in the second half of the fiscal year, from 6.7% in the first half. This projection appears rather optimistic. Although there's a likelihood of improvement in rural demand, urban consumption may remain uneven, given the slower growth in personal loans which likely impacts discretionary spending among households. This divergence between rural and urban consumption patterns signifies a challenge in achieving a uniform and robust growth across all segments of the economy. The balance between these opposing forces will be crucial in determining the overall economic performance.
The nominal GDP figure derived from the advance estimate plays a critical role in the government's budgeting process. The estimate of Rs 324.1 trillion, slightly lower than the Rs 326.4 trillion used in the Union Budget, impacts the fiscal deficit calculation. The government's budgeted fiscal deficit of Rs 16.1 trillion now translates to 5% of GDP, exceeding the budgeted figure of 4.9%. This is significant. However, the anticipated shortfall in capital expenditure is estimated to counterbalance the revenue shortfalls, potentially leading to a narrower-than-budgeted fiscal deficit. This implies that the lower-than-expected nominal GDP may not necessarily result in an increased fiscal deficit-to-GDP ratio. This intricate interplay of expenditure, revenue and capital investment demonstrates the complexity of fiscal management, and the government’s ability to manoeuvre within budgetary constraints.
Looking ahead to 2025-26, ICRA projects a relatively stable GDP expansion of 6.5%. The anticipated improvement in agricultural growth during the latter half of 2024-25 is expected to bolster rural demand in the initial months of the following year. However, maintaining this positive momentum will rely heavily on a normal monsoon season. Urban demand is expected to remain inconsistent in the first half of 2025-26. A reduction in food inflation might offer some relief to low- and middle-income households, potentially stimulating urban consumption later in the year. On the investment side, private capital expenditure is predicted to remain moderate, affected by sluggish merchandise exports and uneven domestic consumption. A significant increase in government capital expenditure will be essential to compensate for these limitations. Considering the anticipated shortfall in government capex in 2024-25, there’s room for a substantial, albeit not exceptionally high, increase in the following year. Fiscal constraints will nonetheless limit this increase, preventing a return to the remarkable 25-30% growth observed in the previous years.
Global economic developments pose a considerable threat to India's GDP growth prospects in 2025-26. The global economic climate is unpredictable and susceptible to various shocks and shifts. Maintaining economic stability in the face of these uncertainties demands effective fiscal and monetary policy measures. The need for strategic and decisive government intervention is clear. The government must carefully manage the interplay between domestic economic forces and external global factors, while implementing robust policies to support India's long-term economic growth and maintain macroeconomic stability. Success in this balancing act will be critical to ensuring the continued growth of the Indian economy.
Source: GDP data: Growth is likely to pick up in second half of the year