India’s real growth rate and the forecast Premium

In the light of a potential growth rate of 6.5%, the achievement of 8.2% in 2023-24 should be considered as a flash in the pan

The First Advance Estimates (FAE) of National Accounts for 2024-25 show a real GDP growth of 6.4% and a nominal GDP growth of 9.7%. These numbers have fallen short of the Reserve Bank of India’s revised growth estimate of 6.6% for real GDP, as in its December 2024 monetary policy statement and 10.5% for nominal GDP growth as in the 2024-25 Union Budget presented in July 2024.

The annual growth of 6.4% can be seen as consisting of 6% growth in the first half and 6.7% growth in the second half. There is, thus, a clear improvement expected over the Q2 growth of 5.4%. The sharp fall in 2024-25 annual GDP growth from that of the previous year at 8.2% is seen only in the case of GDP. With respect to Gross Value Added (GVA), this difference, between 7.2% and 6.4%, is much less. On the GVA side, it was the manufacturing sector which suffered a sharp fall in sectoral growth from 9.9% in 2023-24 to 5.3% in 2024-25.

The Gross Fixed Capital Formation rate at constant prices has ranged between 33.3% and 33.5% during 2021-22 to 2024-25. Thus, it appears to have stabilised around 33.4%. It is expected to continue at this level in 2025-26. The average Incremental Capital Output Ratio (ICOR) has been marginally higher than 5 in recent years. Assuming ICOR to be 5.1 in 2025-26, we may consider a 6.5% real GDP growth to be realistic.

There may not be much change in the global economy even though Donald Trump’s assumption of office may create more uncertainty. India will have to largely depend on domestic demand.

In particular, the Government of India has to ensure that there is no relaxation in its investment expenditure. In fact, the slightly lower growth in 2024-25 is largely linked to the slowdown in the Government of India’s investment growth which has remained negative at (-)12.3% even after eight months into the fiscal year.

With a lower nominal GDP growth in 2024-25 of 9.7% as compared to the budgeted nominal GDP growth of 10.5%, the budgeted Gross Tax Revenue (GTR) of ₹38.4 lakh crore may not be realised if the budgeted buoyancy of 1.03 is maintained. As per Controller General of Accounts (CGA) data, GTR growth for the first eight months was 10.7%. If this growth is maintained for the remaining months also, the realised buoyancy would be about 1.1, which is higher than the budgeted buoyancy. In such a case, tax revenue shortfall will be minimal. In other words, any revenue constraint or likely pressure on fiscal deficit would not constrain the government’s ability to achieve its capital expenditure target of ₹11.1 lakh crore.

However, after the first eight months, the level of the Government of India’s capital expenditure has remained limited to ₹5.14 lakh crore, that is 46.2% of the Budget target. In the remaining four months, the Government of India’s capital expenditure may be accelerated. It may still fall well short of the target. This has been the main reason for the dip in overall real GDP growth in 2024-25.