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. Source: HT