| PYQ Relevance: Q) Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (UPSC CSE 2021) |
Mentor’s Comment: UPSC mains have always focused on major issues like the methodology of India’s Gross Domestic Product (GDP) (2021) and steady GDP growth and low inflation (2019).
The real GDP growth of 6.4% in 2024-25, while slightly below the Reserve Bank of India’s forecast of 6.6% which should not be seen as disappointing. The growth rate is expected to improve in the second half, with manufacturing showing a significant slowdown, contributing to a decline from 8.2% growth in the previous year.
Today’s editorial highlights the growth rates of India in Nominal and real terms and what are the factors behind the low growth rate of India. This content can be used in mains answer GS paper 3 related to GDP of India.
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Let’s learn!
Why in the News?
The First Advance Estimates (FAE) of National Accounts for 2024-25 indicate a real GDP growth of 6.4% and a nominal GDP growth of 9.7%.
Note: The National Statistical Office (NSO) of the Ministry of Statistics and Programme Implementation (MOSPI) releases the FAE.
| What is the difference between Real and Nominal GDP growth rates? • Real GDP growth rate is the rate of change in the volume of goods and services produced, while nominal GDP growth rate is the rate of change in the total value of goods and services produced. • The nominal GDP growth rate includes the effects of inflation, while the real GDP growth rate does not. What factors are contributing to the slowdown in India’s GDP growth? • Decline in Government Investment: The Government of India’s capital expenditure growth has been negative at (-)12.3%, which has significantly impacted overall GDP growth. Limited capital expenditure, reaching only 46.2% of the budget target after eight months, is a primary reason for the slowdown. • Weak Manufacturing Sector Performance: The manufacturing sector has experienced a sharp decline in growth from 9.9% in 2023-24 to 5.3% in 2024-25, contributing to lower Gross Value Added (GVA) figures. • Global Economic Uncertainty: Anticipated uncertainties stemming from global economic conditions, including changes in leadership in major economies like the United States, may hinder India’s export performance and overall economic stability. • Lower Private Consumption Growth: Although Private Final Consumption Expenditure (PFCE) is projected to grow by 7.3%, this is still a potential concern if consumer confidence does not recover adequately. • Previous High Base Effect: The high GDP growth of 8.2% in 2023-24 creates a challenging comparison, leading to perceptions of slowdown even when current growth rates may be consistent with long-term potential. |
How will different sectors of the economy perform in the upcoming fiscal year?
- Agriculture and Allied Sectors: Growth in agriculture is expected to improve significantly, with estimates suggesting a rise to 3.8% compared to 1.4% in the previous year.
- Manufacturing Sector Recovery: There is an expectation for recovery in manufacturing, although it remains uncertain given past performance trends.
- Construction and Services Sectors: The construction sector is projected to grow at around 8.6%, while financial services are expected to see growth of approximately 7.3%, indicating resilience and potential for expansion.
- Private Consumption: Continued growth in private consumption is anticipated which is driven by rural demand and government spending initiatives.
What are the implications of these growth forecasts for policy and investment?
- Need for Sustained Government Capital Expenditure: The government must prioritize capital expenditure to stimulate economic growth and encourage private investment, targeting at least a 20% increase based on revised estimates.
- Focus on Structural Reforms: Policymakers should consider structural reforms that enhance productivity across sectors, particularly in manufacturing and agriculture, to support sustainable growth.
- Investment in Infrastructure: Increased investment in infrastructure projects can provide a multiplier effect on the economy, fostering job creation and boosting demand.
- Monitoring Global Economic Trends: Given the potential impact of global economic conditions on domestic growth, India should remain vigilant and adaptable to external shocks while focusing on strengthening domestic demand.
- Long-Term Growth Strategies: With a potential long-term real GDP growth rate of around 6.5%, strategies should be developed to ensure that this target is met consistently over the next five years through innovation and investment in human capital.
Way forward:
- Accelerate Infrastructure Investment: The government should prioritize and fast-track capital expenditure, especially in infrastructure, to stimulate economic activity, enhance private sector participation, and create jobs, aiming for at least 20% growth in capital investment for the upcoming fiscal year.
- Enhance Sectoral Productivity through Reforms: Implement structural reforms in key sectors like manufacturing, agriculture, and services to boost productivity, reduce bottlenecks, and ensure sustainable long-term growth, focusing on innovation and skill development.
