Editorial: Growing pains

The first advance estimates of National Income for 2024-25 released by the National Statistics Office (NSO) were made public this week. Per government data, India's economic growth rate is estimated to slip to a four-year low of 6.4 per cent in 2024-25, mainly on account of poor showing by the manufacturing and services sector, as well as sluggish investment. The gross domestic product (GDP) rate of 6.4 per cent will be the lowest since the pandemic (2020-21) when the country witnessed a negative growth of 5.8 per cent. It was 9.7 per cent in 2021-22; 7 per cent in 2022-23; and 8.2 per cent in the last fiscal ended March 2024.

The NSO's report, which will be used in preparation for the Union Budget to be presented by Finance Minister Nirmala Sitharaman in the Lok Sabha on February 1, went on to say that robust growth in the farm sector is expected to provide some support and help boost rural consumption. Tellingly, the advance estimate released by NSO is lower than the 6.6 per cent projected by the Reserve Bank in December 2024. The apex bank's state of the economy report released last month seemed optimistic about the nation's economic growth, which it said was likely to improve in the second half of the current fiscal, driven by festive activity and an upswing in rural demand.

The agricultural growth was attributed to healthy kharif crop production, higher reservoir levels, and better rabi sowing. The report expressed caution regarding the slowdown in government capital expenditure and suggested that fiscal spending, including on capital expenditure, could be hindered by the slowing rate of nominal GDP. Interestingly, the NSO report has suggested that lower spending could help the Centre achieve its fiscal deficit target of 4.9% of the GDP for the current financial year, in spite of the estimates projecting a marginally lower growth rate. At current prices, the GDP has been pegged at Rs 3.24 lakh cr, a little lower than the Rs 3.26 lakh cr estimate used in the budget.

Urban consumption, regarded as a major driver of growth, has undergone drastic transformations in the aftermath of the pandemic. The current slowdown in urban spending that we are witnessing is the result of a crushing one-two punch, delivered by rising inflation, high interest rates, which impacted EMIs. This was compounded with a low wage increase of 0.7% between 2017-18 and 2022-23. The curtailed spending was amplified by reverse migration, and work from home, which had reduced the consumer base in big metros, which eventually led to stakeholders pinning their hopes on the rural markets.

The issues that demand top billing at this point in time include navigating challenges posed by global economic uncertainties and geopolitical tensions, strategies to enhance employment, creating sustainable job opportunities across sectors, attracting private investment and mobilising public funds for infrastructure projects, boosting exports and attracting foreign investments. Stakeholders have sought that in the forthcoming budget, the government should prioritise infrastructure development through budgetary spending and asset monetisation. This could enhance logistics efficiency and catalyse the backward integration of manufacturing activities that rely on imported components such as electronics.

The provision of production linked incentives for sectors with greater domestic value addition and greater investment needs, could spur private capital expenditure. There are also calls for cuts in income, fuel and consumption taxes, along with import tariffs, aimed at pushing India’s growth to 7%.