Part 2:
India’s economy is growing, but will it grow fast enough to reach its ambitious targets?
Ahead of the Union Budget 2025, India’s economic outlook remains a mixture of promise and caution, with key indicators pointing to both resilience and areas of concern. To fully grasp the state of India’s economy, one must look beyond the headlines and into the numbers. At its core, Gross Domestic Product (GDP) serves as the most common yardstick, measured in two forms: Nominal GDP, which reflects the total value of goods and services at current prices, and Real GDP, which adjusts for inflation to enable meaningful comparisons over time. While the GDP growth rate usually refers to the latter, the size of the economy is expressed in terms of the former.
After an impressive GDP growth of 8.2 percent in FY 2023-24, India’s economy slowed to roughly 6 percent in the first half of the current fiscal year. Opposition parties have been quick to seize on the downturn, but the broader context is less grim. The OECD’s December 2024 outlook pegged global growth at 3.2 percent, with India projected to expand by 6.8 percent in FY 2024-25 - more than double the pace of developed economies, which are expected to grow at a mere 3 percent. By that measure, India’s resilience is undeniable.
Digging deeper into the components, Private Final Consumption Expenditure (PFCE) grew by 6.7 percent in the first half of FY 2024-25, bolstered by robust rural demand even as urban consumption softened. Meanwhile, Gross Fixed Capital Formation (GFCF), which represents investment in fixed assets, expanded by 6.4 percent in the same period. However, GFCF growth faltered in the second quarter due to a slowdown in government capital expenditure and a cautious private sector wary of election-related uncertainty, geopolitical risks, excess industrial capacity, and the threat of cheap imports flooding the market. The tremors were felt in lacklustre corporate earnings, which in turn dragged down stock indices.
Government Final Consumption Expenditure (GFCE), after contracting in the first quarter, rebounded with 4.1 percent growth in the second. The election-induced slowdown in public spending was inevitable, as the Model Code of Conduct put a temporary freeze on policy decisions. By August 2024, with a new government in place and a fresh budget passed, the wheels of expenditure began turning again. Public investment, particularly in infrastructure, is a crucial driver of economic momentum, and its revival could well determine the trajectory of the coming quarters.
Trade figures presented a mixed picture. Merchandise exports grew a modest 1 percent, driven by non-oil shipments, while merchandise imports climbed 6.2 percent, with non-oil, non-gold/silver imports rising by 3.9 percent. A $0.5 billion current account surplus in Q1 turned into a $21.4 billion deficit by Q2, reflecting a widening trade imbalance that weighed on GDP growth.
The third quarter, however, was marked by a buoyant festive season and an uptick in government spending. Large capital-intensive firms saw their order books swell by 23 percent in FY 2024, far outpacing the compound annual growth rate of 5 percent seen in previous years. As these projects move from planning to execution, industrial activity is already showing signs of revival, setting the stage for stronger numbers in the second half of the fiscal year.
By sheer scale, the Indian economy remains formidable. In the first half of FY 2024-25, its nominal GDP stood at Rs. 153.91 lakh crores—approximately $1.8 trillion. Projections from the Ministry of Statistics and Programme Implementation estimate nominal GDP for the full fiscal year at Rs. 324.11 lakh crores, or roughly $3.8 trillion. Yet, for all the talk of economic milestones, the dream of a $5 trillion economy, championed by Prime Minister Narendra Modi, remains just that - a dream, at least for now. Even breaching the $4 trillion mark by 2025 appears increasingly unlikely.
Beyond sheer numbers, the bigger challenge lies in India’s long-term goal: achieving ‘Vikasit Bharat’ - developed nation status by 2047. One benchmark for this transformation is a per capita GDP between $12,000 and $15,000. India’s current figure? $2,939 in FY 2025. To meet the 2047 target, annual growth must sustain a minimum 6.5 percent trajectory. So far, the economy is holding steady but will it be enough? The next wave of high-frequency indicators may provide the answer.
(The author is a Chartered Accountant and works at Authomotive Division of Mahindra and Mahindra Limited. Views personal.)
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