Decoding India’s growth slowdown

India's GDP growth rate decline, official estimates questioned, and economic slowdown analysis by experts and academics.

The first advance estimates of India’s Gross Domestic Product (GDP) in 2024-25, released by the National Statistics Office (NSO) this week, shows a decline in the real GDP growth rate to 6.4% from 8.2% registered in 2023-24. This is lower than the 6.5 to 7% range projected by the Economic Survey in July 2024. The growth rate of nominal GDP, which is the sum of the real GDP growth rate and the overall inflation rate, is estimated at 9.7% in 2024-25 — significantly lower than the 10.5% growth rate projected in the last Union Budget.

The official diminution of India’s projected GDP growth rate may still be an underestimation of the extent of economic slowdown. Academics and institutional experts have consistently pointed out serious defects in the official GDP estimates, with the International Monetary Fund (IMF) recommending an upgrade of the real sector statistics. An “Informational Annex” to the 2023 IMF Staff consultation report on India had inter alia noted that, “...the compilation of constant price GDP deviate from the conceptual requirements of the national accounts, in part due to the use of the Wholesale Price Index (WPI) as a deflator for many economic activities. The appropriate price to deflate GDP by type of activity is the Producer Price Index (PPI), which is under development. Large revisions to historical series, the relatively short time span of the revised series, major discrepancies between GDP by activity and GDP by expenditure, and the lack of official seasonally-adjusted quarterly GDP series complicate analysis. Together, these weaknesses make it challenging to monitor high frequency trends in India’s economy through official statistics, particularly from the demand side.” The estimation of real or constant price GDP requires the use of a GDP deflator to estimate values of GDP components in constant prices. The GDP deflator being used in India’s official estimates is a weighted average of wholesale and retail price indices. The Wholesale Price Index (WPI), 2011-12 series has shown high volatility over the past decade, leading to inexplicably large divergences between the WPI and CPI inflation rates (Chart 1). This has had serious implications for the accuracy of the GDP deflator and real GDP estimates.

For instance, the nominal GDP growth rate was estimated at 14.2% in 2022-23 and 9.6% in 2023-24, which indicated a sharp decline in growth (Table 1). 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%, 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. In short, 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. Such anomalous and confounding data on macroeconomic fundamentals invariably lead to delusions and policy errors.

Tabled a day ahead of the Union Budget last July, the Economic Survey 2023-24 had taken comfort in the 8.2% growth in real GDP and indicated a vigorous expansion of investment by the private-sector. Yet, the Chief Economic Advisor had asked whether the corporate sector responded positively to the tax cuts of September 2019, and complained about sluggish corporate investments in machinery and equipment and intellectual property products. He criticised the disproportionate allocation of gross fixed capital formation (investment) in the private sector to “dwellings, other buildings and structures” as an unhealthy mix.

Throwing such caution to the wind, the Union Budget relied entirely on a revival of the private corporate capex cycle to announce the ‘Prime Minister’s Package for Employment and Skilling’ with an outlay of ₹2 trillion, aimed at benefiting 41 million youth over a five-year-period. The employment linked incentive/subsidy scheme and the internship programme for one crore youth in five years, were premised on the expectation of massive job creation, consequent to an acceleration of private corporate investment. The fiscal consolidation roadmap, whereby the fiscal deficit was projected to decline from 5.6% of GDP in 2023-24, to 4.9% in 2024-25 and 4.5% in 2025-26, was also announced with the budgetary expectation of the private sector taking a lead in the capital formation process. However, 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. A longer view of India’s growth trajectory over the past decade, even on the basis of exaggerated official national account estimates, shows the irrationality of official expectations.

The annual growth rates of real gross fixed capital formation in public and private sectors (%) 

During the 10 years of the United Progressive Alliance (UPA) rule, between 2004-05 and 2013-14, the average annual growth of real GDP was at 6.8%, investment 10% and private consumption 6% (Chart 1). Between the onset of the present regime till the outbreak of the pandemic, that is, between 2014-15 and 2019-20, real GDP grew at an annual average rate of 6.8% (exactly similar to UPA), but real investment growth fell to 6.3% while private consumption growth increased to 6.8%. Thus, economic growth under NDA was not investment led, as was the case under UPA.