Slowdown in GDP growth: Reasons /Challenges

GDP Growth Seen at 4-Year Low of 6.4% on Weak Manufacturing and Investment

• Explanation: India’s real GDP growth for FY25 is projected to be 6.4%, which marks a four-year low. This decline is attributed to sluggish growth in manufacturing and investments. Both sectors are expected to grow at lower rates compared to the previous fiscal year, contributing to the overall slowdown in GDP growth.

2. First Advance Estimates for FY25:

• Explanation: These estimates are based on data extrapolated from the first seven to eight months of the financial year. These early estimates are used by government departments, especially the Ministry of Finance, to formulate the upcoming Union Budget. The estimates predict a GDP growth of 6.4% for FY25, which is lower than previous projections by both the RBI (6.6%) and the government’s Economic Survey (6.5-7%).

3. H2 GDP Growth Projected at 6.7%:

• Explanation: Despite the weak performance in the first half (H1) of FY25, the economy is expected to show some recovery in the second half (H2). H2 growth is projected at 6.7%, up from 6.0% in H1, but the weak performance in the first half brings the overall growth down to 6.4%.

4. Weak Growth in Primary and Secondary Sectors:

• Explanation: Both the primary (agriculture) and secondary (manufacturing, mining) sectors are showing slowdowns. For instance, manufacturing is expected to grow at just 5.3% in FY25, down from 9.9% in FY24. Similarly, mining growth is expected to slow significantly from 7.1% to 2.9%.

5. Weak Investment and Slow Private Sector Capex:

• Explanation: Investment growth, especially in the corporate sector, has not picked up as expected. Gross Fixed Capital Formation (GFCF), which reflects investment in physical assets, is expected to grow at just 6.4% in FY25, compared to 9% in FY24. This weak investment is also linked to sluggish private sector capital expenditure (capex), reflecting a lack of confidence in the economy.

6. Government Expenditure to Support Growth

• Explanation: Higher government spending is one of the factors supporting the overall economic growth. Government Final Consumption Expenditure (GFCE) is expected to grow by 4.1%, up from 2.5% in FY24. This increase in government spending is aimed at stimulating the economy during a phase of weak private sector demand.

7. Growth in Consumption Demand:

• Explanation: Private Final Consumption Expenditure (PFCE), which reflects household consumption, is expected to grow at 7.3% in FY25, an improvement over the previous year’s 4% growth. This growth is expected to be driven by rural demand, aided by a strong crop output. However, urban demand has lost some momentum due to slow wage growth.

8. Challenges in Investment and Corporate Growth:

• Explanation: Although private consumption is picking up, investments (especially private investments) are not showing significant growth. Investment growth in the second half of FY25 is expected to remain at the same level as the first half, indicating that private investment is not picking up meaningfully.

9. Sector-wise Growth Outlook:

• Explanation:
  • The agriculture sector is seeing a positive growth trend, with Real GVA (Gross Value Added) growth expected to rise to 3.8% in FY25, compared to 1.4% in FY24.
  • The services sector continues to perform relatively better, with an estimated growth of 7.2% in FY25, driven by public administration and defense services. Other services such as trade, transport, and real estate are expected to grow at slower rates.

10. Overall Economic Slowdown and Impact of Base Effect:

• Explanation: The slowdown in growth is also partly attributed to a strong base effect from previous years, which made the growth figures appear higher than they were. The economy is now entering a cyclical slowdown phase, affecting key sectors like manufacturing, mining, and investment.

11. Nominal GDP Growth and Fiscal Outlook

• Explanation: India’s nominal GDP is projected to grow by 9.7% to Rs 324 lakh crores in FY25. However, this growth is slightly below the estimates in the Union Budget. The government’s fiscal deficit is expected to stay within manageable levels, with some analysts predicting that it could even undershoot the target due to higher-than-expected tax collections.

12. Key Takeaways from the GDP Estimates

• Explanation: While India’s economy is still growing, the rate of growth has slowed significantly, especially when viewed over a longer period. Factors like weak private consumption growth, sluggish investment, and a large reliance on government spending are holding back the economy. The pace of economic expansion is much lower than what is needed for India to become a developed economy by 2047. The current trend suggests India is growing at an annual rate of less than 5%, which is half the rate required for rapid economic development.

In summary, while India’s GDP is growing, the pace of growth has slowed down due to weak industrial output, investment, and consumption demand. Government spending is helping to keep growth on track, but the economy faces challenges in sustaining higher growth in the long term.