India’s GDP growth projected to fall to a 4-year low: NSO

Context: The First Advance Estimates of the National Statistics Office (NSO) for FY 2024-25 show a fall in projected GDP growth to a 4-year low pace of 6.4%. This calls for a reality check for India’s economic growth trajectory. 

Relevance of the Topic: Prelims: GDP Growth- Trends, Components, Factors affecting GDP Growth rate. 

What is an Advance Estimate?

• Advance Estimates are essentially a forecast of what the government expects India’s economic output to be at the end of the financial year in March.
• These estimates are made by extrapolating available data and past trends.

Data from NSO’s First Advance Estimates of GDP 2024-25:

• Real GDP: expected to reach Rs. 184.88 lakh crores in FY 2024-25.
  • Provisional estimate of GDP for FY 2023-24 was Rs. 173.82 lakh crore.
• Real GDP growth: expected to rise at a 4-year low pace of 6.4%.
  • For 2023-24, it was at 8.2%.
• Real Gross Value Added (GVA): expected to rise by 6.4%.
  • For 2023-24, it increased by 7.2%.
• Among 8 economic sectors, only 2 registered higher growth than last year:
  • Agriculture: expected to rise 3.8% from 1.4% last year.
  • Public Administration, Defence and Other Services: increased 9.1% from 7.8% in 2023-24.
• Construction GCA Growth: pegged at 8.6% from 9.9% last year.
• Manufacturing GVA Growth: expected to nearly halve from 9.9% in 2023-24 to 5.3% this year. 
• GVA in Mining & Quarrying: expected to rise just 2.9% from 7.1% last year.
• Gross Fixed Capital Formation (GFCF): expected to grow at a pace of just 6.4% compared to 9% rise in 2023-24. 
• Private Final Consumption Expenditure: expected to expand 7.3% from 4% in 2023-24.
• Government Final Consumption Expenditure: seen rising 4.1% from 2.5% last year. 

How is GDP Calculated in India?

• GDP is calculated by adding up all the money spent in the economy. 
• There are 4 engines of GDP Growth:
  • Private Final Consumption Expenditure
  • Government Final Consumption Expenditure
  • Gross Fixed Capital Formation
  • Net Exports. 

• Private Final Consumption Expenditure (PFCE):
  • It is calculated as the total spending by individuals.
  • It accounts for almost 60% of India’s GDP. 
• Government Final Consumption Expenditure (GFCE):
  • Spending by governments to meet daily expenditures such as salaries, etc.
  • Accounts for 10% of GDP.
• Gross Fixed Capital Formation (GFCF):
  • Spending towards boosting the productive capacity of the economy.
  • Includes investments by the government to build roads, companies building factories or buying office equipment, etc.
  • Accounts for around 30% of GDP.
• Net Exports:
  • Resultant of Indians spending on imports and foreigners spending on Indian exports.
  • Since Indian exports < Indian imports, net exports for India are negative. 

Factors holding back GDP Growth in India

• Low growth rate of Private Spending:
  • What Indians spend in their personal capacity is the most vital determinant of GDP growth.
  • If this growth rate is low, it drags down the overall GDP. Further, it discourages investments in the economy.

• Sluggish growth in Government spending:
  • Unlike other players in the economy, governments can potentially spend in excess of their incomes.
  • When the rest of the economy is struggling, governments are expected to borrow money and spend it in a manner to re-energize the economy.
  • However, Government’s own spending has grown just 4.2% in the current year, and an average of 3.1% since 2019.
• Petering out of Investments growth:
  • Spending towards productive capacity increases if:
    • Private businesses find it profitable to expand capacity (in the hope of selling it to the public)
    • Governments boost capital expenditure (spending towards physical infrastructure).
  • In FY 2024-25, this spending has gone up by just 5.3% annually.
  • Investment growth in the economy has been fading away since 2014.
  • Unless private consumption rebounds, businesses will not invest in fresh capacity, regardless of tax incentives.

Thus, over a longer period, India’s real economy has grown at less than 5% per annum- almost half the rate at which it would need to if it is to become Viksit Bharat by 2047.