Decoding India’s Growth Slowdown

Decoding India’s Growth Slowdown

Sub: Eco

Sec: National Income

Why in News?

• The National Statistics Office (NSO) released the first advance estimates of India’s GDP for 2024-25, indicating a decline in real GDP growth to 6.4%, lower than the previous year’s 8.2%, which highlight concerns about economic slowdown, data reliability, and the effectiveness of fiscal policies and private investments in driving growth.

Context:

India’s growth trajectory faces challenges due to structural issues in private investments, fiscal strains, and data discrepancies in GDP estimation methods.

A re-evaluation of revenue mobilization strategies is needed to sustain economic recovery and enhance public welfare spending.

Key Points:

GDP Growth Estimates:

• The first advance estimate (FAE) for 2024-25 projects real GDP growth at 6.4%, lower than the 8.2% recorded in 2023-24 and below the Economic Survey’s projected 6.5%-7% range.
• Nominal GDP growth is estimated at 9.7% (lower than the Union Budget’s 10.5% projection).

Reasons for India’s Growth Slowdown

Declining Private Investments:

• Private sector investment growth slowed to 6.4% in 2024-25 (from 9% in 2023-24).
• Despite corporate tax cuts in 2019, private investments in capital formation remain subdued.
• Public sector investment grew faster than private investments (6.6% vs. 6.3%).

Issues under Sectoral Growth:

• Quarterly Gross Value Added (GVA) shows a decline across most sectors in 2024-25
  • Agriculture: Cyclical fluctuations.
  • Manufacturing: Double-digit growth in 2023-24 now declining.
  • Mining, power, construction, and trade sectors also exhibit a slowdown.
• Public administration, defense, and other services are the only sectors with an expected GVA increase, emphasizing the critical role of public spending in sustaining growth.

Fiscal Stress and Budget Challenges:

• Budget challenges:
  • Tax revenue mobilization lags behind projections:
    • April-November 2024: Only 56% of net tax revenue targets achieved.
    • Capex spending: Less than 50% of budgeted amounts for 2024-25.
  • Non-tax revenue boosted by ₹2.11 trillion surplus from RBI, achieving 78% of the target by November 2024.
  • Fiscal consolidation plans (reducing fiscal deficit to 4.9% in 2024-25 against 5.6% of GDP in 2023-24) may face hurdles due to slowing tax revenues and growth.

Recommendations to boost growth:

• Revenue Mobilization Strategy:
  • Increase taxation on wealth and profits to enhance capital expenditure (capex) and welfare spending.
• Addressing Data Accuracy:
  • Adopt the Producer Price Index (PPI) for GDP calculations to improve reliability.
• Boost Private Investments:
  • Incentivize investment in machinery and intellectual property to drive productive growth.
• Maintain Public Spending:
  • Sustain public capex to mitigate economic slowdown and support critical sectors