Assessing India’s Economy Through the Latest GDP Estimates

Why in News?

The Government of India has recently released the Second Advance Estimates (SAE), which assess the country’s economic growth for the financial year 2024-25. 

• These estimates have been published by the Ministry of Statistics and Programme Implementation (MoSPI).
• This report specifically evaluates Real GDP, which is calculated at constant prices by adjusting for the effects of inflation. 
• The SAE provides crucial insights into the direction of economic activities in the coming months, helping the government in policy formulation.

Key Highlights of Second Advance Estimates (SAE)

The Government of India has released the Second Advance Estimates (SAE) for 2024-25, providing an initial assessment of the country’s economic activities and growth rate. GDP is calculated in two forms: Nominal GDP (without inflation adjustment) and Real GDP (adjusted for inflation).

• Exchange Rate and Its Impact on GDP: India’s exchange rate significantly impacts GDP. Currently, the exchange rate stands at ₹85 per USD, compared to ₹61 per USD in 2014. If the exchange rate had remained stable, India’s GDP would have been approximately $5.3 trillion, but at the current rate, it is estimated to be only $3.8 trillion. This means that the GDP valuation appears lower, affecting India’s relative position in the global economy.
• Decline in GDP Growth Rate: 
  • Due to COVID-19, GDP contracted in 2020-21, leading to a slowdown in economic activities.
  • In the past few years, Real GDP growth has remained below 5%, whereas the average growth rate since 1991 was around 7%.
  • Nominal GDP growth has also slowed to less than 10%, compared to an average of 13.5% between 2003-04 and 2018-19.
• Nominal vs. Real GDP: 
  • Nominal GDP – As per MoSPI, India’s GDP in 2024-25 is projected to be ₹324 lakh crore, a 9.7% increase from the previous year. However, this growth is affected by inflation.
  • Real GDP – After adjusting for inflation, Real GDP is expected to be ₹184.9 lakh crore, which is only 57% of Nominal GDP. This indicates that the actual economic productivity has not increased as much as it appears in nominal terms.
• Quarterly GDP Data: MoSPI has released three quarterly GDP estimates:
  • Q3 (October-December) GDP growth – 6.2% (YoY)
  • Q2 (July-September) GDP growth – Revised from 5.4% to 5.6%
  • FY24 annual GDP growth – Revised from 8.2% to 9.2%
• Consumption Expenditure and Consumer Demand:
  • Private Consumption (PFCE) plays a crucial role in GDP growth. Initially estimated at 4% for FY24, it has now been revised to 5.6%.
  • Consumer spending has shown strong momentum, with private consumption expenditure rising by 7.6% in FY25.
  • GDP growth in FY25 will primarily be driven by private consumption, while the contribution from government and private sector investment will be relatively limited.

Key Sectors and Their Contribution: 

• Manufacturing Sector – The fastest-growing sector in FY23-24, expanding by 12.3% due to industrial production, exports, and policy support. However, its growth is expected to slow to 4.3% in FY24-25.
• Construction Sector – Contributed significantly due to infrastructure investments and urban expansion, growing at 10.4% in FY23-24, with an estimated 8.6% growth in FY24-25.
• Financial, Real Estate, and Business Services – Achieved 10.3% growth in FY23-24, but this may decline to 7.2% in FY24-25.
• Public Administration, Defense, and Other Services – Maintained steady growth, with 8.8% in both FY23-24 and FY24-25, driven by government policies, defense expenditure, and administrative reforms.

Key Stages of India’s GDP Estimates

India’s Gross Domestic Product (GDP) figures undergo multiple stages of revision to provide a more accurate and comprehensive economic assessment. 

• First Advance Estimate (FAE): The First Advance Estimate (FAE) of GDP is released in January and is primarily based on data from the first two quarters of the financial year (Q1: April-June and Q2: July-September). Since it includes only initial data, it is not completely precise.
• Second Advance Estimate (SAE): The Second Advance Estimate (SAE) is released in February and incorporates data from the first three quarters (Q1, Q2, and Q3: October-December). As a result, it is considered a more reliable estimate of GDP. Along with the SAE, the First Revised Estimate (FRE) is also released, which updates the GDP figures for the previous financial year.
• Provisional Estimate (PE): The Provisional Estimate (PE) is released in May, including data from Q4 (January-March). This estimate refines the Second Advance Estimate (SAE) and improves accuracy.
• First Revised Estimate (FRE): The First Revised Estimate (FRE) is published in February of the following year, making further refinements to the GDP figures of the previous financial year.
• Final Estimate (FE): The Final Estimate (FE) is released in February, two years later. This is the most accurate and comprehensive version of GDP data, incorporating all necessary revisions and detailed statistics.

Significance of GDP Revisions in India

• Policy Decisions: Revised GDP data helps the government and policymakers assess the actual economic situation more effectively. Early estimates often include incomplete or projected data, but as more information becomes available, revised estimates provide a clearer picture of the economy.
• Fiscal Policy: GDP figures play a crucial role in the formulation of Union and State Budgets. If the GDP growth rate turns out to be lower than initially estimated, the government must adjust spending, revenue, and fiscal deficit accordingly. If GDP growth is higher than expected, the government may focus on reducing the fiscal deficit and implementing new economic policies.
• Monetary Policy: GDP data influences the Reserve Bank of India’s (RBI) Monetary Policy. If revised GDP data indicates economic slowdown, RBI may lower interest rates to increase liquidity, boost consumption, and encourage investment. If GDP growth is strong, RBI may adjust interest rates to prevent inflationary pressures.
• India’s Economic Credibility: GDP revisions are crucial for international institutions such as the World Bank, International Monetary Fund (IMF), and credit rating agencies (Moody’s, S&P, Fitch). These organizations analyze India’s GDP data to assess the country’s credit rating and investment risks.

Major Challenges in India’s GDP Growth

• Decline in Private Consumption Expenditure: Private Final Consumption Expenditure (PFCE) contributes around 60% to India’s GDP, making it the most significant driver of economic growth. However, since FY 2020, its growth rate has been relatively low. The Compound Annual Growth Rate (CAGR) of PFCE has been just 4.8%, which is less than 5%. This sluggish growth impacts overall GDP because when consumer spending declines, companies hesitate to increase production and create new jobs.
• Limited Growth in Government Expenditure: Government Final Consumption Expenditure (GFCE) accounts for about 10% of GDP. Despite the COVID-19 pandemic, government spending has increased only marginally. In recent years, the growth rate of GFCE has been only 4.2%, which may slow down economic momentum. Government expenditure is crucial for infrastructure development and welfare programs, but limited growth in spending has prevented the economy from achieving its full potential.
• Decline in Investment: Gross Fixed Capital Formation (GFCF) contributes about 30% to GDP, but its growth remains restricted. While GFCF is projected to grow at 6.3%, its long-term growth rate has been just 5.3%. A decline in investment affects industrial expansion and limits the growth of production capacity.
• Trade Imbalance (Exports vs. Imports): India’s Net Exports are usually negative, meaning that imports exceed exports. Although the gap between exports and imports has narrowed in recent years, which is a positive sign, the trade imbalance remains a major challenge. This imbalance affects foreign exchange reserves and overall economic stability.
• Low Productivity Growth: India’s Real GDP Growth Rate has remained below 5% in recent years, indicating an economic slowdown. Productivity growth has been slow, impacting industrial output and the services sector. Additionally, inflation and real output remain major concerns. After adjusting for inflation, India’s actual production growth is not as strong as nominal figures suggest.

Way Forward

To achieve the goal of becoming a developed nation by 2047, India must maintain a high and sustained economic growth rate. Currently, India’s economy is estimated to be growing at 5%, while the required growth rate is above 7%.

• Structural Reforms: India needs to boost private investment and infrastructure development. Without investment in new projects, it will be difficult to increase production capacity and employment. The government must implement long-term investor-friendly policies to ensure economic stability.
• Human Resource Development: India must focus on education, skill development, and innovation to build a productive workforce. Currently, India’s labor productivity is below expectations, affecting economic growth. To compete globally, technological advancements and workforce upskilling should be prioritized.
• Inclusive Growth: Economic growth should not be limited to urban areas and industries but should extend to the rural economy as well. India needs a balanced and sustainable growth model that provides equal opportunities for all sections of society.

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