To Grow Economy, Help Consumers Spend

1. The first advance GDP growth estimate for India in 2024-25 was eagerly awaited due to concerns about slowing domestic demand, volatility in financial markets, and uncertainty in global policies.
2. The Indian economy had already slowed significantly in the second quarter of 2023-24, growing at just 5.4%, which was below expectations.
3. This led to negative feelings about the economy.
4. The advance GDP estimate shows a moderation in growth, with GDP growth expected to slow to 6.4% in 2024-25, down from 8.2% in 2023-24.
5. However, growth is expected to pick up in the second half of 2024-25, with an expected growth rate of 6.7% in the second half, compared to 6% in the first half.

Key Points and Data:

1. Reasons for Slower Growth:

   1. Government Spending (Capex):
      1. After the Covid pandemic, India's GDP growth has been mostly driven by government spending on projects. However, in the current fiscal year, government spending has slowed down because of elections at the state and central levels.
      2. In the first eight months of this year, the Central government's spending on projects fell by 12%.
      3. State government spending (in 20 large states) also dropped by 6% during the same period.
      4. Public Sector Enterprises (CPSEs), which are government-run companies, reported a 10.8% decline in spending in the first half of the year.
   2. Because of this, investment growth (spending on buildings, machinery, and infrastructure) is expected to slow down to 6.4% in 2024-25, down from 9% last year.
   3. While government spending was expected to improve in the second half of the year, advance estimates suggest that investment growth may stay the same in the second half, which is concerning for future growth.

2. Increase in Private Consumption:

   1. A positive sign is the increase in private consumption, which is expected to grow by 7.3% in 2024-25, compared to just 4% in the previous year. Since about 55% of India's GDP comes from people’s spending, this increase in consumption will help the economy grow.
   2. Rural consumption has improved, supported by strong agricultural production due to a good monsoon.
   3. However, urban consumption has shown some signs of slowing down because of high food prices (around 7.6%).
   4. If food inflation slows down, consumption is expected to rise in the coming months.

3. Improvement in Exports:

   1. Exports of goods and services are expected to grow by 6% in 2024-25, an improvement from 2.6% growth last year.
   2. Services exports are doing well, and merchandise exports (physical goods) are also showing some recovery.
   3. However, there are concerns about global economic conditions:
      1. The US economy is growing, but there are worries about slower growth in the EU and China.
      2. With a new US president expected, there is uncertainty about the trade policies, which could affect global trade.
      3. There has been volatility in financial markets and the US dollar has been getting stronger, which could affect India’s exports.

4. Sector-wise Growth:

   1. Agriculture: The agricultural sector is growing well, thanks to a good monsoon.
   2. Services: The services sector is expected to grow at 7.2%, slightly down from 7.6% last year.
   3. Industry: There is concern over slower industrial growth, which is expected to drop from 9.5% last year to 6.2% in 2024-25.
      1. Mining and manufacturing have slowed down significantly.
      2. However, the construction sector remains strong, with continued growth.

5. Nominal GDP Growth:

   1. The nominal GDP growth (which includes both inflation and real growth) is estimated to be 9.7%, lower than the budgeted growth of 10.5%.
   2. Despite this lower growth, the fiscal deficit target set by the government (the difference between its income and spending) is still achievable, even with slower growth.
   3. However, the government is likely to miss its capital expenditure target by around ₹1.5 trillion due to the slow pace of spending.

6. Outlook for 2025-26:

   1. The economy is expected to grow at 6.7% in 2025-26, which is slightly better than the current year’s estimate, but still below the 7-8% growth rate seen in the past two years.
   2. Despite this slower growth, India’s economy is still performing relatively well compared to the challenges in the global economy.
   3. The decrease in growth from previous years is a concern and needs to be addressed, especially with the Union Budget approaching.

7. Steps to Support Growth:

   1. Focus on Government Spending: The government should continue to prioritize capital expenditure (spending on infrastructure, buildings, and machinery) to support growth, but it should also focus on boosting private consumption.
   2. Increasing Domestic Consumption: Since private investment is recovering slowly and external demand is uncertain, the government must find ways to increase domestic consumption (people’s spending within the country).
      1. One way to boost consumption is by reducing personal income taxes, which will encourage people to spend more.
   3. Job Creation and Skill Development: The government should continue its focus on creating jobs and improving skills to raise household incomes and increase spending.
   4. Fiscal Deficit and Revenue Targets: The government has set a target to reduce the fiscal deficit (the gap between income and spending) to below 4.5% of GDP by 2025-26. However, even if the deficit is 4.7% in 2025-26, it will still be manageable.
   5. The government should focus more on growth-promoting measures and proceed cautiously with its fiscal targets.

Conclusion

To help the economy grow, the government must continue focusing on capital expenditure, but it must also take steps to increase domestic consumption. A steady rise in people’s spending is important because private investment is recovering slowly and the global economy is uncertain. In the Union Budget, the government should focus on creating jobs, improving skills, and offering tax relief to help people spend more. These measures can help the economy grow at a healthy rate in the coming years.

 

Also Read
Public Administration Optional	UPSC Daily Current Affairs
UPSC Monthly Mgazine	Question Answer Practice For UPSC
Free MCQs for UPSC Prelims	UPSC Test Series
ENSURE IAS NOTES	Our Booklist