Context: The Ministry of Statistics and Programme Implementation (MoSPI) has released the provisional estimates of economic growth for FY25. India’s GDP growth rate in FY25 hit a four-year low of 6.5%, slowing down sharply from the 9.2% growth recorded in FY24.
Relevance of the Topic: Prelims: GDP Growth- Trends, Components, Factors affecting GDP Growth rate.
How is Economic growth measured?
Economic growth is measured using two metrics.
- Gross Domestic Product (GDP) is calculated by adding up all the expenditures made in the economy, including expenditures by Indians in their individual capacity, expenditures by governments, expenditures by private businesses, etc. This provides a picture of the demand side of the economy.
- Gross Value Added (GVA) looks at the supply side. It effectively measures the contribution of each sector of the economy by calculating and summing the value added (or income) at each stage of production.
Both GDP and GVA are linked: they measure the same economic performance but through different routes. Their relationship can be spelled out using the following equation:
GDP = (GVA) + (taxes earned by government) - (subsidies provided by government)
- MoSPI provides GDP and GVA data both in nominal terms (in present day prices) and real terms (after taking away the effect of inflation). Both nominal and real data have their own analytical significance.
- For any financial year, GDP estimates go through several revisions. The provisional estimates will be revised over the next few years.
Understanding Gross Domestic Product (GDP):
- Definition: GDP is the total market value of all goods and services produced within India's geographical boundaries in a specified period.
- Real vs. Nominal GDP:
- Nominal GDP: value of all the final goods and services at current market prices, without adjusting for inflation.
- Real GDP: adjusts nominal GDP for inflation. It reflects the economy’s true growth by accounting for changes in price levels.
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: Total spending by individuals.
- Government Final Consumption Expenditure: Spending by governments to meet daily expenditures such as salaries, etc.
- Gross Fixed Capital Formation: 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.
- Net Exports: Resultant of Indians spending on imports and foreigners spending on Indian exports.
Key takeaways from the recently released data:
- Nominal GDP & its growth: India’s nominal GDP grew to Rs 330.7 trillion (lakh crore) by the end of March 2025. When converted into US dollar terms, the size of India’s economy was $3.87 trillion.
- Real GDP & its growth: India’s real GDP grew by 6.5% in FY25 to reach a level of Rs 188 trillion.
- GVA & sectoral health of economy: For FY25, the real GVA grew by 6.4%.
- The GVA data best captures the true momentum of the Indian economy as it provides insight into the health of the sectors of the Indian economy. It also excludes the effects of taxes and subsidies, which can distort GDP figures.
- Three main sectors of the Indian economy: (a) Agriculture and allied activities (such as forestry, etc.) (b) Industry (including sub-sectors such as manufacturing, construction) (c) Services (including fields like financial services, trade and hotels)
Despite external challenges (like supply chain disruptions and energy market volatility), the Indian economy remains relatively healthy due to its limited reliance on global goods trade, recent tax cuts, controlled inflation and potentially softer interest rate environment.
India continues to benefit from strong service sector performance, a stable banking system, and improving manufacturing output under schemes like PLI.