New Delhi The Indian economy is expected to grow at 6.4% in 2024-25, a significant loss of momentum when compared to the 8.2% growth in 2023-24. Driven by a slowdown in investment, this is the lowest this number has been since the pandemic induced a contraction of 5.8% in 2020-21 and is also lower than both the Reserve Bank of India’s and government’s initial forecasts — suggesting that the policy establishment either did not see the slowdown coming or was complacent about headwinds to growth, including those generated by monetary policy.
How economic policy responds to these numbers will be seen in the Union Budget which is due on February 1 and the next Monetary Policy Committee (MPC) meeting of RBI which is scheduled from February 5-7. The former will decide the broad direction of fiscal policy and the latter will decide whether monetary policy finally makes an effective pivot and starts cutting interest rates. This will provide relief to households with mortgage payments as well as lower the cost of new investment.
The National Statistical Office (NSO) released the first advanced estimates of GDP for the fiscal year 2024-25 on Tuesday projecting a GDP growth of 6.4% . This number was 7% and 8.2% in 2022-23 and 2023-24. The 2021-22 GDP growth of 9.7% is misleading because it came on the back of a -5.8% number in 2020-21.
While the latest GDP growth estimate is in line with the 6.4% forecast by a Bloomberg poll of economists, it is significantly lower than institutional forecasts at the beginning of the fiscal year. The 2023-24 Economic Survey — it was presented along with the Union Budget in July 2024 — for example, projected a GDP growth of 6.5% to 7% for 2024-25. RBI’s MPC started with a projection of 7% in its April 2024 resolution, revised it upward to 7.2% until its October resolution and then made a downward revision to 6.6% in the December meeting. Even IMF’s World Economic Outlook projected a 7% GDP growth for India in 2024-25 in October 2024.
The bottom line from all of these comparisons is the same. Almost everyone overestimated India’s economic momentum in the first half of the fiscal year. India’s quarterly growth rate fell to a four-quarter low of 5.4% in the quarter ending September 2024 according to data released in November 2024, inflicting a huge negative surprise on everyone. RBI’s MPC forecast this number to be 7% in its October 2024 resolution.
The projected growth rate of 6.4% assumes a growth of 6.7% in the second half (October-March) of the ongoing fiscal year, which is 45 basis points — a basis point is one hundredth of a percentage point — lower than the growth assumed in MPC’s December resolution.
What has led to this growth slowdown in the Indian economy? From an expenditure side perspective, the culprit seems to be a slowdown in investment rather than consumption. Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE) growth is expected to increase from 4% to 7.3% and 2.5% to 4.1% respectively between 2023-24 and 2024-25. Growth in Gross Fixed Capital Formation (GFCF), on the other hand, is expected to fall from 9% to 6.4% during this period. A slowdown in investment basically means subdued expectations of future demand and can therefore set of a vicious cycle of low growth.
By sector, the slowdown is attributable to the non-farm non-government services one. While growth in agriculture and allied activities and public administration, defence and other services is expected to increase from 1.4% to 3.8% and 7.8% to 9.1% respectively, every other sector is expected to lose growth momentum. The slowdown is particularly severe is manufacturing which is expected to grow at 5.3% in 2024-25 compared to 9.9% in 2023-24.
To be sure, the slowdown in Gross Value Added (GVA) between 2023-24 and 2024-25 is milder than the shortfall in GDP growth. The former is expected to change from 7.2% to 6.4%. GDP is basically GVA plus indirect taxes less subsidies. Nominal GDP growth – it serves as the base for revenue collection – in 2024-25 is expected to be 9.7% which is lower than the 10.5% number assumed in the July 2024 Budget . Whether this leads to a shortfall in revenue collections remains to be seen.
How will economic policy react to the latest GDP estimates which suggests that the economy is losing growth momentum? RBI has been debating this issue within MPC for some time now with some members arguing for a rate cut while others including the outgoing governor Shaktikanta Das arguing that the Indian economy continued to be “resilient”.
The choice for fiscal policy is likely to be more complicated than monetary policy as it has committed itself to future consolidation in a quest to align the deficit target to FRBM targets. The July 2024 budget has set a fiscal deficit target of 4.9% for 2024-25 and 4.5% for 2025-26.
Independent economists expect monetary policy to support growth going forward in an environment which is constrained by external volatility.
“Food inflation has finally begun to ease. Our analysis of 100 activity indicators shows that growth trends in the quarter ending December have improved, but remain below June levels. And the fiscal math shows that tax revenues are softening, and expenditure will have to be disciplined over the next fiscal year (FY26), if the fiscal deficit target is to be met. What all of this means is that some of the responsibility to push up growth will fall on the shoulders on monetary policy. We expect two rate cuts over 25bp each over Feb and April, taking the repo rate to 6%…But we expect it to be a shallow rate cutting cycle. One reason is our expectation of a smaller BoP surplus, which could lower the room to manoeuvre, especially at a time of heightened global FX volatility,” Pranjul Bhandari, chief India economist, HSBC, said in a research note issued on January 7.
The second advance estimates of GDP will be released on February 28 along with the quarterly GDP data for October-December 2024.