India’s GDP growth projected to fall short of RBI’s forecast

India’s economy is projected to grow by 6.5% to 7.0% in the financial year ending March 2025. This projection is lower than the Reserve Bank of India’s (RBI) forecast of 7.2%. But what is GDP, how is it calculated? What are the key factors that influence a country’s GDP?

What is GDP?

Gross domestic product (GDP) is the monetary or market value of all the final goods and services produced within a country in a specific time period. It provides an economic snapshot of a country, estimating the size of its economy and growth rate. GDP is considered the “world’s most powerful statistical indicator of national development and progress.” It can also be broken down by industry or sector to understand their respective contributions.

There are two main measures of GDP: Nominal GDP and Real GDP. 

Nominal GDP: It refers to the value of goods and services evaluated at current market prices without factoring in inflation or deflation. It is also called the Current GDP. 

Real GDP: An inflation-adjusted measure that reflects both the value and quantity of goods and services produced by an economy in a given year. 

The GDP estimates are revised three times before the final GDP numbers are released: 

Advance Estimates (AE): It is based on high-frequency indicators (such as sales data or industrial output) for the first 7-8 months of the fiscal year, which are used to capture the level of economic activity in each sector.

Revised Estimate (RE): The first RE is based on the actual funds that the government is likely to disburse to particular sectors by the end of a financial year. RE is given as a counter to the Budget Estimates and applies only for the current fiscal year.

Final Estimates (FE): Published after comprehensive data collection and verification across all sectors.

India’s GDP growth projection

According to the 2023-24 Economic Survey report, India’s economy is projected to grow by 6.5% to 7.0% in the financial year ending March 2025. This projection is lower than the RBI’s forecast of 7.2% and last year’s Economic Survey forecast of 8.2% GDP growth. The actual GDP growth rate for 2023-24 was 7.6%.

Chief Economic Advisor V. Anantha Nageswaran has highlighted several risk factors that could impact GDP growth, including unpredictable weather patterns, financial market uncertainties in developed economies, and geopolitical disturbances, which may adversely impact the growth rates of developing economies like India.

As the world’s largest democracy, with the largest population and a GDP valued at $3.5 trillion, India’s economic prowess has been closely scrutinised by the world. The South Asian giant now ranks as the fifth largest economy worldwide with a global GDP contribution projected to reach over 8.0%. 

However, India continues to be categorised as an “emerging economy” alongside Asia’s other key economic power, China. This can be attributed to factors like low per capita income relative to its large population, which remains a challenge despite rapid economic expansion. 

Significance of quarterly and annual reports

Quarterly data for the Indian Economy are released as follows;

1st Quarter (Q1): January-March

2nd Quarter (Q2): April-June

3rd Quarter (Q3): July-September

4th Quarter (Q4): October-December

There is a few months lag in releasing the quarterly data, resulting at times in delayed policy response.

Graph 1: Quarter-wise Real GDP Growth Rates (%) for FY 2018-19 to FY 2024-25 (Q2) (Constant Prices). (Base Year: 2011-12).

The National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI), releases Annual and Quarterly estimates of GDP. Quarterly estimates of GDP are useful to gauge the movement of the economy at short intervals. It helps in the provision of frequent updates on the macro economic situation so that the policy makers can make timely adjustments to relevant policy measures.

A key advantage of quarterly estimates is their ability to serve as an early indicator of economic downturn. For instance, two consecutive quarterly declines in GDP indicate that the economy might be heading for recession. Quarterly estimates also enhance transparency and quality of data by providing regular insights into the economy’s performance.

Recent developments in the Indian economy

Recent figures released by the government indicate a slowing down of the economy. The Q2 2024-25 (July-September 2024) figures from the NSO show that real GDP growth slumped to a seven-quarter low of 5.4%, compared to 6.7% in Q1 2024-25 (April-June 2024) and 8.1% in Q2 2023-24 (July-September 2023). However, the economy has been expected to recover due to a number of factors such as festive demand (boosting consumption during festivals), and rural activity spurred by a healthy growth of the agricultural sector.

Based on current developments, the RBI’s Monetary Policy Committee (MPC) in its latest meeting has revised India’s GDP forecast for 2024-25 from 7.2% to 6.6%. Despite this downgrade, they expect several positive factors to support economic growth, which are:

— Healthy Kharif Crop and better Rabi sowing, indicating a healthy growth of the agricultural sector.

— Expected normalisation of the Industrial Sector. 

— Enhanced government capital expenditure post-elections.

— Continuous and robust growth of the service sector.

Taking all the above factors into account, the RBI has projected real GDP growth for 2024-25 at 6.6%, with Q3 at 6.8%, and Q4 expected to increase to 7.3%.

The government remains optimistic that the Q3 data will make up for the downturn in Q2 due to the continuous growth of the agricultural and service sector. The industrial sector is expected to grow due to the increase in the Government’s capital expenditure. 

Some economists feel that this could have been aided by a decrease in the repo rate from 6.5%, which was left unchanged by the MPC. However, in its December 2024 meeting, the MPC reduced the Cash Reserve Ratio (CRR) by 50 basis points (bp) to 4%, injecting additional liquidity into the banking system. 

Post Read Questions

What does Gross Domestic Product (GDP) represent in economic terms?

Why is GDP considered the “world’s most powerful statistical indicator of national development”?

What are the key sectors driving growth in the Indian economy according to the government?

How are the agricultural and services sectors contributing to the government’s optimism for Q3?

(Meera Malhan and Aruna Rao are Professors in economics at Delhi University.)

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