Whither India’s GDP?

There has been an uproar in the media about India’s GDP since the release of the Press Note? (https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2079024) by the Ministry of Statistics and Programme Implementation on November 29, 2024. The note informed that the “Real GDP has been estimated to grow at 5.4% in Q2 of FY 2024-25”, implying that India’s real GDP growth rate was likely to hit a seven-quarter low. The estimate was much lower than the 7% growth rate projected by RBI for the quarter. The sluggish assessment also puts a question mark on the 7.2% growth rate projected by RBI for FY 2025.

Piqued by the significant decline in official assessment of GDP growth rate, I decided to explore what the GDP growth rates have been in the last few years. I accessed the data published by RBI on India’s GDP (https://www.rbi.org.in/scripts/annualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy). The nominal GDP, the real GDP, their growth rates, and the implied inflation rates for the last several years are presented in Table 1.

The implied inflation rate is computed for each year using the following relationship:

(1 + Growth Rate in Real GDP) x (1 + Inflation Rate) = (1 + Growth Rate in Nominal GDP)

The Economic Survey for FY 2023-24 published just before the budget on July 22, 2024, by the Ministry of Finance assessed the retail inflation rate for FY 2023-24 at 5.4%. The figure is well above the inflation rate of 1.33% for FY 2023-24 implied by the provisional GDPs for FY 2023-24 published by RBI.? ??

Assuming that the final nominal GDP will be almost the same as the provisional nominal GDP for FY 2023-24, if the inflation rate of 5.4% as estimated by the Economic Survey were used, the growth rate in real GDP for FY 2023-24 would be 3.98%. This growth rate is much lower than the real GDP growth rate of 8.15% for FY 2023-24 implied by RBI data.

The RBI uses an undisclosed method to arrive at the implied inflation rate used for converting nominal GDP to real GDP. A comparison of implied inflation rate for FY 2023-24 with the implied inflation rates for the preceding two years shows that the rate used was particularly low despite high retail inflation rate of 5.4% for the year. Is it possible that the internal consistency of the methodology from year to year received less attention due to the focus on presenting a high GDP growth rate in an election year?

As the GDPs for FY 2023-24 are provisional, it is possible that the final growth rate in the real GDP for FY 2023-24 will be revised downward from 8.15%. The implication of such a correction is that the real GDP growth rate for the remaining two quarters of FY 2024-25 will surprise us on the upside - just from the effect of lower base for the previous year, and not necessarily because the GDP expanded. The government’s assertion of significantly higher GDP growth rates in the second half of FY 2024-25 may become a self-fulfilling prophecy, allowing the government to take credit for the outcome.

Even if we accept the reported high real GDP growth of 8.15% for that year, the Compounded Annual Growth Rate (CAGR) of Real GDP from FY 2017-18 to FY 2023-24 works out to just 4.77%. While the 5.4% GDP growth in Q2 of FY 2024-25 is concerning, the broader issue is the underwhelming performance of the Indian economy over the past six years. Blaming COVID for the low average growth rate is not justified as the negative growth in FY 2020-21 due to COVID also resulted in much higher growth rate the following year.

To truly lift India out of persistent poverty, GDP growth rate needs to consistently reach double-digit levels. It is imperative to engage in a serious discussion about the government’s policies that may be limiting economic growth.

#LowGDPgrowthQ2FY2024-25 #RealGDP #NominalGDP #InflationRate #IndiaGDP