Decoding India’s Growth Slowdown

Context: The National Statistics Office (NSO) released the first advance estimates of India’s Gross Domestic Product (GDP) in 2024-25. It shows a decline in the real GDP growth rate to 6.4% from 8.2% registered in 2023-24. The official diminution of India’s projected GDP growth rate may still be an underestimation of the extent of economic slowdown.

Relevance of the Topic: Prelims: Economic Slowdown- Trend Analysis

Data Discrepancies in GDP Estimates

1. Issues with GDP Deflator:

• GDP deflator is a weighted average of wholesale and retail price indices. It is used for the estimation of real or constant price GDP to estimate values of GDP components in constant prices.
• The Wholesale Price Index (WPI), 2011-12 series has shown high volatility over the past decade. The WPI volatility leads to inexplicably large divergences between the WPI and CPI inflation rates.
• This has had serious implications for the accuracy of the GDP deflator and real GDP estimates.
  • For instance, nominal GDP growth rate was at 14.2% in 2022-23 and 9.6% in 2023-24, which indicated a sharp decline in growth.
    • However, the real GDP growth rate was estimated to have grown from 7.0% to 8.2%, indicating growth acceleration. 
  • This implied that the GDP deflator was only 1.4% in 2023-24, even as retail inflation was at 5.4%
    • This is because the WPI inflation rate was estimated to have fallen from a high of 9.4% in 2022-23 to a negative of -0.7% in 2023-24. 
  • Thus, because of high volatility in the WPI, the nominal GDP estimate showed a growth deceleration in 2023-24 but the real GDP estimate reflected growth acceleration. 

• IMF Observations:
  • IMF has criticised India’s reliance on WPI as a deflator, recommending Producer Price Index (PPI) for better accuracy.
  • The absence of seasonally-adjusted GDP data and discrepancies between GDP by activity and expenditure hinder real-time economic analysis.

2. Elusive Private Investment:

• Investment Trends:
  • The latest GDP estimates have shown a significant decline in the growth of real gross fixed capital formation from 9% in 2023-24 to 6.4% in 2024-25. 
• Irrational official expectations:
  • Economic Survey 2023-24 indicated a vigorous expansion of investment by the private-sector. 
  • However, the Chief Economic Advisor highlighted the sluggish corporate investments in machinery and equipment and intellectual property products. 
  • The Union Budget over-relied on private corporate investment for massive job creation through ‘Prime Minister’s Package for Employment and Skilling’.
  • A longer view of India’s growth trajectory over the past decade shows the irrationality of official expectations.

3. Sectoral Trends:

• Downward trends in manufacturing, mining, construction, and key services sectors.
• Only public administration, defence, and other government services show increased growth, emphasizing the role of public expenditure.

4. Fiscal Challenges:

• Tax revenue growth has slowed, with only 56% of the annual target achieved by November 2024.
• Less than half of the budgeted capital expenditure (₹11.11 trillion) was utilised during the same period.
• Balancing fiscal consolidation with growth-enhancing public spending remains a critical challenge.

Way Forward: Balancing Growth with Fiscal Discipline

• Economic slowdown has disrupted budgetary plans by slowing down tax revenue growth. Adhering to the fiscal consolidation path would imply a squeeze on public spending, including capital expenditure. This in turn would further aggravate the slowdown. The way out is to rework the revenue mobilisation strategy by enhancing taxation on wealth and profits in order to enhance capex and welfare spending.