Assessment of the state of India's economy by the latest GDP estimates

Why in the NEWS?

• The Ministry of Statistics and Programme Implementation (MoSPI) released the "First Advance Estimates" (FAE) of India's GDP growth in the current financial year ending in March (2024-25 or FY25).

Key Points:

• This estimate provides the government with a forecast about economic activity in the coming months, allowing them to formulate policies and take budget decisions.

Effect on exchange rate:

• India's exchange rate has fallen to Rs 85 per dollar over the years.
• If this exchange rate had remained stable at around Rs 61 per dollar in 2014, India's GDP today would have been around $5 trillion (to be precise $5.3 trillion).
• According to MoSPI data, India's economic output (GDP) growth rate is slowing down compared to previous years.
• According to MoSPI, the estimated nominal GDP for FY25 is Rs 324 lakh crore, lower than the previous budget estimates of Rs 328 lakh crore presented last February and Rs 326 lakh crore presented in July. 

Exchange rate and GDP projections:

• Current exchange rate: 
  • At Rs 85 per dollar, India's nominal GDP for financial year 2025 (FY25) is estimated to be $3.8 trillion.
• Exchange Rate Effect: 
  • If India's exchange rate had remained at Rs 61 per dollar as it was in 2014, India could have claimed to be a $5 trillion economy, and could have reached $5.3 trillion.
• This shows that India's GDP is being relatively underestimated due to the fall in the exchange rate, which affects the relative position of the Indian economy.

Analysis of Nominal and Real GDP:

• Nominal GDP: 
  • According to MoSPI, India's nominal GDP may be Rs 324 lakh crore by March 2025, which will be 9.7% higher than FY24. This means that the size of India's economy has increased.
• Real GDP: 
  • However, after taking inflation into account, real GDP is estimated to be Rs 184.9 lakh crore, which is just 57% of the nominal GDP. 
  • This shows that a large part of India's GDP growth is due to price rise, and real output has not increased that much.

Declining Growth Rate:

• Declining Growth Rate: 
  • India's real GDP growth rate is declining. There was a contraction in 2020-21 due to Covid, and its growth rate has been less than 5% in the last few years. 
  • After 1991, India's average growth rate was around 7%, while in the last few years it has declined at a CAGR of 4.8%.
• Low Growth on Nominal GDP: 
  • In the last few years, nominal GDP growth has also been less than 10%, which is much lower than India's previous record (nominal GDP grew at an average rate of about 13.5% between 2003-04 and 2018-19).

Factors Restraining India's GDP Growth:

• Key Expenditure Categories:
• Private Final Consumption Expenditure (PFCE): 
  • It accounts for about 60% of India's GDP and is the most important determinant of growth. 
  • However, its growth rate since FY20 has been relatively low at a CAGR of only 4.8%. 
  • This rate has been less than 5%, which affects overall GDP growth.
• Government spending (GFCE): 
  • Government spending accounts for about 10% of GDP. 
  • Despite Covid, government spending has increased marginally, growing only by 4.2%.
• Spending on productive capacity (GFCF): 
  • This spending usually accounts for about 30% of GDP, but growth in this sector has also been limited. 
  • It is estimated to grow by 6.3%, but its long-term growth rate has been only 5.3%.
• Net exports: 
  • India's net exports are usually negative, that is, imports exceed exports. 
  • However, the gap between exports and imports has narrowed in the last few years, which could be a positive sign.
• Negative growth and declining investment:
• Declining investment: 
  • Investments made to increase productive capacity are declining. Since 2014, investment growth has slowed, as businesses are not keen on new investments unless private consumption increases.
• Corporate investment and government capital expenditure: 
  • Government spending on infrastructure has been relatively slow. Moreover, private companies are also not enthusiastic about investing in the economy unless they have profit potential.
• Slowdown in economic output:
• Low productivity growth: 
  • As mentioned above, India's real GDP growth has been less than 5%, which indicates that output growth in the economy is relatively slowing down.
• Inflation and real output: 
  • If we remove the effect of inflation, India's real output growth rate is not satisfactory. 
  • This means that despite the increase in prices, there has been no real improvement in output.

Findings and conclusions:

• Statistical fallacy: 
  • A large part of India's high GDP growth rate has been due to the low base of GDP. 
  • After the contraction in 2020-21, there was a statistical fallacy in inflating its figures. 
  • However, if one looks at the data of 2019-20 (before Covid), it is clear that India's economy is growing at a rate of less than 5%. 
• Growth required to become a developed country: 
  • If India wants to become a developed country by 2047, it will have to grow at the rate of 7% every year. 
  • Currently, India is growing at half its pace, which may harm its growth potential in the long run.