India’s Economic Growth Trends and Projections

Recent data from the National Statistical Office (NSO) marks India’s economic performance and projections for 2025-26. The national accounts data released on February 28, 2025, presents revised estimates of Gross Domestic Product (GDP) and Gross Value Added (GVA) for the years 2022-23, 2023-24, and 2024-25. The third quarter of 2024-25 shows a growth of 6.2%, a rise from the previous quarter’s 5.6%.

Sectoral Performance Overview

The agriculture sector reported a growth of 5.6% in the third quarter. Manufacturing, however, struggled with a growth rate of 3.5%, slightly better than the previous quarter’s 2.1%. The services sector, particularly trade and hospitality, improved with a growth of 6.7%. These sectoral performances illustrate the uneven recovery across different economic areas.

Quarterly Growth Analysis

The quarterly GDP growth rates for 2024-25 stand at 6.5%, 5.6%, 6.2%, and an expected 7.6% for the fourth quarter. The decline in the second quarter’s growth is primarily due to a decrease in private final consumption expenditure (PFCE) from 4.3 to 3.3 percentage points. Achieving the anticipated 7.6% growth in the fourth quarter would require increase in PFCE, estimated at 9.9%, which is unlikely based on historical trends.

Investment Contributions to Growth

Investment also plays important role in GDP growth. Its contribution was 2.3, 2.0, 1.8, and 2.1 percentage points across the four quarters of 2024-25. The government’s capital expenditure must rise to meet revised estimates. The current expenditure of ₹7.57 lakh crore suggests a shortfall if the government does not increase spending in the final months of the financial year.

Revisions in Annual Growth Rates

Revised annual GDP growth rates indicate an upward adjustment. For 2022-23, 2023-24, and 2024-25, growth rates are now estimated at 7.6%, 9.2%, and 6.5%, respectively. The manufacturing sector and financial services saw the most upward revisions. The decline in gross capital formation from 10.5% in 2023-24 to 5.8% in 2024-25 explains the drop in GDP growth.

Medium-Term Growth Prospects

Looking ahead to 2025-26, nominal growth rates are projected to exceed the Budget’s assumption of 10.1%. Real GDP growth is expected to range between 6.3% and 6.8%, with a midpoint of 6.55%. Achieving 6.5% growth is feasible if government investments remain stable amidst global uncertainties.

Investment and Saving Rates

The medium-term strategy should focus on increasing both saving and investment rates. The overall nominal saving rate for 2023-24 is estimated at 30.7%, slightly below pre-COVID-19 levels. The real investment rate is projected at 33.4% for 2024-25, indicating potential growth aligned with an Incremental Capital-Output Ratio (ICOR) of 5.1.

Questions for UPSC:

1. Critically discuss the impact of private final consumption expenditure on GDP growth in India.
2. Examine the relationship between gross capital formation and economic growth in India.
3. Analyze the implications of government capital expenditure on India’s economic forecasts.
4. Estimate the potential effects of a rising saving rate on investment and economic growth in India.

Answer Hints:

1. Critically discuss the impact of private final consumption expenditure on GDP growth in India.

1. PFCE is a major component of GDP, contributing to overall economic growth.
2. In 2024-25, PFCE contributed 4.3, 3.3, 4.1, and 5.3 percentage points across the quarters.
3. The decline in PFCE from Q1 to Q2 (4.3 to 3.3) directly impacted the GDP growth rate, causing it to drop to 5.6%.
4. Historical data shows that achieving high PFCE growth (like the required 9.9% for Q4) is challenging.
5. Increased consumption demand can lead to higher economic activity, but it must be balanced with investment to sustain growth.

2. Examine the relationship between gross capital formation and economic growth in India.

1. Gross capital formation (GCF) represents investments in physical assets, crucial for economic expansion.
2. In 2024-25, GCF growth fell from 10.5% in 2023-24 to 5.8%, contributing to a decline in GDP growth.
3. Investment contributions to GDP were 2.3, 2.0, 1.8, and 2.1 percentage points across the quarters.
4. Lower GCF indicates reduced future productive capacity, impacting long-term economic growth.
5. Government capital expenditure is essential to boost GCF and support economic recovery and growth.

3. Analyze the implications of government capital expenditure on India’s economic forecasts.

1. Government capital expenditure is vital for infrastructure development and stimulating economic growth.
2. As of January 2025, the government spent ₹7.57 lakh crore, needing an additional ₹2.61 lakh crore to meet targets.
3. Shortfalls in government spending could hinder achieving the anticipated GDP growth of 7.6% in Q4.
4. Increased capital expenditure can boost private investments by enhancing overall economic confidence.
5. Failure to meet revised expenditure estimates may lead to downward revisions in overall GDP growth forecasts.

4. Estimate the potential effects of a rising saving rate on investment and economic growth in India.

1. A higher saving rate can provide more capital for investments, promoting economic growth.
2. The nominal saving rate in 2023-24 is estimated at 30.7%, slightly below pre-COVID-19 averages.
3. Increased savings can lead to higher investment rates, enhancing productive capacity and growth potential.
4. Real investment rate projected at 33.4% for 2024-25 indicates a strong relationship between savings and investment.
5. However, a focus solely on consumption without corresponding investment can hinder sustainable economic growth.