Have you noticed the latest buzz around India’s economic growth? You might be concerned about the future if you’re watching the numbers. The National Statistics Office (NSO) has released its first advance estimates, indicating that India’s GDP growth for the fiscal year 2024-25 (FY25) is set to slow down to 6.4%.
This figure marks the lowest growth rate in four years and falls short of the Reserve Bank of India’s (RBI) projection of 6.6%. Let’s break down what this means and why there’s still a silver lining in the second half of the fiscal year.
Key Takeaways from GDP Estimates
- Real GDP Growth: 6.4% for FY25, down from 8.2% in FY24.
- Nominal GDP Growth: Projected to grow by 9.7% in FY25, a slight increase from 9.6% in FY24.
- Gross Value Added (GVA): Real GVA growth is expected to remain at 6.4%, compared to 7.2% in FY24.
- Sectoral Growth:
- Agriculture: 3.8% growth in FY25, up from 1.4% in FY24.
- Construction: 8.6% growth in FY25, down from 9.1% in H1.
- Services: Slight increase to 7.2% in FY25 from 7.1% in H1.
- Expenditure Growth:
- PFCE: 7.3% growth in FY25, up from 6.7% in H1.
- GFCE: 4.1% growth in FY25, up from 2% in H1.
- Investment Demand: Remains steady at 6.4% in FY
- Source: MOSPI
Understanding the GDP Slowdown
The NSO’s estimate of 6.4% growth represents a significant deceleration from the 8.2% growth rate recorded in FY24. This slowdown is attributed to various factors, including subdued consumer demand and elevated inflation rates. In the first half of FY25 (H1), the economy grew at 6%, but the NSO anticipates an improved performance in the second half (H2), with GDP growth expected to rise to 6.7%.
Breakdown of the Estimates
The First Advance Estimates of GDP incorporate industrial production data from October and lead indicators up to December, projecting a stronger second half. The Gross Value Added (GVA) growth is also pegged at 6.4%, aligning with the GDP growth rate. This alignment suggests that indirect taxes and subsidies will likely balance each other out, maintaining overall economic stability.
Sectoral Insights: Agriculture and Manufacturing on the Rise
One of the key highlights of the NSO’s report is the anticipated improvement in the agriculture and manufacturing sectors during H2 FY25.
- Agriculture: Agriculture grew by 2.7% in the first half, but the NSO estimates a robust 3.8% growth for the entire fiscal year. This uptick is expected due to healthy reservoir levels and favorable soil moisture conditions supporting rabi cultivation.
- Manufacturing: The manufacturing sector saw a 4.5% growth in H1 and is projected to increase to 5.3% in FY25. This growth is primarily driven by a likely recovery in domestic demand, which is crucial for sustaining manufacturing activities.
While these sectors show promise, not all areas are set to perform equally. For instance, the labor-intensive construction sector is expected to slow down in H2, with growth dipping from 9.1% in H1 to 8.6% in FY25. On the other hand, the services sector is projected to see a marginal increase, growing from 7.1% in H1 to 7.2% in FY25.
Expenditure Trends: Private and Government Spending
On the expenditure side, private and government spending is expected to grow faster in the second half of FY25 than in the first half.
- Private Final Consumption Expenditure (PFCE): Estimated to grow by 7.3% in FY25, up from 6.7% in H1. This increase indicates stronger consumer spending, a positive sign for the economy.
- Government Final Consumption Expenditure (GFCE): Projected to rise by 4.1% in FY25, compared to 2% in H1. Increased government spending can help sustain economic activities and support various sectors.
However, investment demand, represented by gross fixed capital formation, is expected to grow at the same rate of 6.4% in FY25 as in H1. This stagnation suggests private investment is not picking up, which could concern long-term economic growth.
Inflation and Global Factors
Inflation remains a significant concern, with the December inflation rate expected to exceed 5%. Although vegetable prices moderated somewhat during the season, it wasn’t enough to counterbalance the substantial price increases observed in recent months.
Global uncertainties also affect the economic outlook. The incoming Trump presidency has added depreciation pressure on the rupee.
Additionally, the US Federal Reserve will likely maintain its current stance in the upcoming January meeting, which could lead to higher US yields and further pressure on the rupee. Given these global factors and elevated inflation, the RBI is expected to adopt a cautious approach, possibly waiting for more evidence that inflation is moderating before considering any rate cuts.
Source: Business Standard
Nominal GDP and Fiscal Deficit
The NSO has estimated nominal GDP growth to be 9.7% for FY25, slightly lower than the 10.5% assumed in the Budget. This marginal slowdown could make it challenging for the government to achieve its fiscal deficit target of 4.9%. However, sluggish capital expenditure might lead to substantial savings for the government, helping it stay on track with fiscal consolidation efforts.
Conclusion
India’s GDP growth for FY25 is projected to slow to 6.4%, the lowest rate in four years. While this may seem concerning, there are positive signs, particularly in the agriculture and manufacturing sectors, which are expected to perform well in the second half of the fiscal year. Improved consumer demand and increased government spending also support the economy. However, rising inflation and global uncertainties remain challenging, making understanding these factors important to grasping the economic outlook for the months ahead.
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I’m Archana R. Chettiar, an experienced content creator with
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