Is India's GDP Underestimated?
Amid global turmoil, new numbers suggest that the Indian economy is pivoting from heady to steady levels of growth. EPISODE #209
Dear Reader,
A very happy Monday to you.
Last week the Central Statistical Office (CSO) released the first advance estimates for India’s economic growth in 2024-25. They projected a growth of 6.4%, modest compared to the heady rate of 8.2% logged last year.
The obvious question is whether the Indian economy is pivoting from a heady to a steady rate of growth? Or as one analyst argued, this projection was conservative and the actual numbers would be higher?
Either way this number is important as it is the keystone of Finance Minister Nirmala Sitharaman’s upcoming union budget. This week I will unpack these numbers.
Happy reading.
Heady to Steady?
Last week the Central Statistical Office (CSO), the official gatekeeper of India’s economic data, released the first advance estimates (FAE) of India’s growth numbers in 2024-25.
They projected the Indian economy to grow at a more modest, yet still very impressive, 6.4% in 2024-25 compared to the 8.2% in 2023-24.
The key highlights are as follows:
Agriculture sector is estimated to grow by 3.8%, compared 1.4% in 2023-24.
Construction sector is estimated to grow at 8.6%;
Financial, Real Estate & Professional Services sector to grow at 7.3%;
Private Final Consumption Expenditure rebounds to 7.3% compared to 4% last year;
Government Final Consumption Expenditure to accelerate to 4.1% compared to 2.5% in 2023-24.
A quick summary of the above is that economic growth is decelerating from the heady highs of the last two years, but is still growing impressively—especially when compared to the rest of the world.
Further, the growth momentum is more broad-based and unlike in the last four years not entirely premised on the government driving capital expenditure. In other words, this growth trajectory is sustainable.
GDP Underestimated?
The thing is that CSO’s growth projections for 2024-25 is a tad lower than the 6.6% estimated by the Reserve Bank of India (RBI). The question is that are the CSO’s projections an underestimate?
According to Neelkanth Mishra, chief economist at Axis Bank, barring for the covid-19 year, CSO has consistently underestimated growth in its FAE by 1.4%—in other words actual growth could even top 7%. Check the graphic above sourced from Axis Bank Research.
There is every reason to believe that this may indeed happen. CSO makes these projections based on the performance of the economy in the previous period and balanced by trends in recent years.
This fiscal year has overlapped with the general election, which effectively put the brakes on government spending, both at the national and state level, for four months ending July. Government spending has since been kickstarted, even while we are beginning to witness reasonable levels of brownfield investments by India Inc—though greenfield investments are yet to gather the desired momentum.
In fact, the quick estimates of the Index of Industrial Production (IIP) released just days after CSO put out its GDP projections, suggest that industrial growth is gaining momentum.
Check out the graphic below, especially the line graph capturing growth in the IIP.
Union Budget 2025
Like I flagged in the introduction, keep in mind that these numbers are the keystone for Finance Minister Nirmala Sitharaman’s upcoming budget—a record breaking eighth consecutive union budget.
All the expenditure, revenue calculations in the union budget hinge on CSO’s growth projection. In other words, if indeed the growth projections are an underestimate, the FM’s revenue and expenditure estimates will be conservative. This is not a bad thing at all—it is always better to promise less and deliver more.
To be sure the tailwinds of the heady growth momentum of 2023-24 are missing. Besides, beginning 20 January when Donald Trump takes charge as the President of the United States, the world is likely to witness a fresh economic churn—especially if President Trump imposes additional tariffs on imports from China, Canada and Mexico.
Recent economic numbers suggest that the US economy is seeing a fresh threat of inflation. In other words, the US Federal Reserve is unlikely to fast track the interest rate cuts it had promised. This means global currencies, including the rupee, will face fresh pressures in 2025-26.
Worryingly, India is yet to see off the worst of the retail inflation spiral in the last few years. Combined with global macroeconomic headwinds, this is more than a handful for the FM to deal with. It will be interesting to see how the new leadership at RBI will shape monetary policy in these new circumstances.
For now, all eyes on 1 February.
Recommended Viewing
Sharing the latest episode of Capital Calculus.
Recently, a unsavoury spat broke out amongst the supporters of President-elect Donald Trump. The differences were simmering but boiled over in public on the issue of H1B visas, especially after Elon Musk vented on the social media platform X.
This face off also put the spotlight on Indian techies who corner three-quarters of these work visas every year. Will the Indian American community then face a backlash? More importantly what is the fate of the H1B visa programme?
To answer all this and more, StratNews Global spoke to US-based Mark Krikorian, Executive Director, Centre for Immigration Studies.
Sharing the link below.
Till we meet again next week, stay safe.
Thank You!
Finally, a big shoutout to Gautam for his informed response, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all readers. Gratitude to all those who responded on Twitter (X) and Linkedin.
Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I will be grateful therefore if you could spread the word. Nothing to beat the word of mouth.
Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
Situation at present is a bit of a concern for India and next fortnight could actually influence the annual budget. The price of Brent crude, crossing $80 a barrel, after a long time, is not good news for India. The deteriorating relationship with Bangladesh is a fresh irritant, which will be a distraction from the more critical issues in front of the government. The restart of the Trump Era, although important, is being given too much hype and the fact that the President will have his hands full in taking control internally, in the first few months, is not being factored in, I feel. Still the imminent ceasefire in the Ukraine Russia War and the return of peace in the Gaza strip, will affect the mood in the rest of the world. Let us hope that the FM rolls out a visionary budget for 2025 - 26. Thank you Anil, for sharing this wonderful article.