The nominal GDP growth projection of 10.5 percent outlined in the interim budget for 2024-25 is based on three scenarios worked out by the finance ministry. One of them assumes a real GDP growth of as little as 6 percent the next financial year, a senior government official told Moneycontrol.
The finance ministry is assuming a real GDP growth rate of either 6, 6.5, or 7 percent for the next fiscal, the official said, adding that the deflator could be anywhere between 3.5 to 4.5 percent for FY24-25.
"Any of these combinations that help us reach 10.5 percent (nominal GDP growth) would be good for us," this official said.
The difference in real and nominal growth is called the GDP deflator, which is a combination of wholesale and retail inflation, with the former accounting for a larger share. A fall in inflation leads to a fall in the GDP deflator too. India's wholesale inflation rose to a nine-month high of 0.73 percent in December 2023, data released by the commerce ministry on January 15 showed. The Wholesale Price Index (WPI) inflation was 0.26 percent in November 2023, and 5.02 percent in December 2022.
By assuming that real GDP growth for FY24-25 could be as low as 6 percent, the interim budget has seemingly opted for a more conservative approach, given that the rate is widely expected to be close to 7 percent for the next fiscal.
While the budget does not make a forecast for real GDP growth, the finance ministry said in a report on January 29 that the Indian economy's growth rate may be close to 7 percent in 2024-25. "The strength of domestic demand has driven the economy to a 7 percent-plus growth rate in the last three years," the ministry said in a report authored by officials from the office of the Chief Economic Advisor, V Anantha Nageswaran.
The nominal GDP growth assumption for 2024-25 is one of the most crucial numbers in the budget as it determines estimates such as the fiscal deficit and the growth in tax collections. For instance, a higher nominal GDP growth – and, consequently, a higher nominal GDP – can make the fiscal deficit smaller as a percentage.
Defending what could be termed a modest target, Economic Affairs Secretary Ajay Seth said on February 1, "Our nominal GDP assumption is 10.5 percent. Last year, several of you said that we are underestimating or overestimating, while we said that we have a realistic number. Of course, this year the growth has been a little lower. Our sense is next year, a 10.5 percent nominal growth rate is a reasonable number."
In 2023-24, nominal GDP growth slowed down, coming in at 8.9 percent per the statistics ministry's first advance estimate, sharply lower than the central government's projection of 10.5 percent.
Normalisation of the base effect and the key WPI inflation remaining subdued due to cooling global commodity prices have been responsible for nominal growth undershooting the government's expectations this year.
However, with wholesale inflation – which has a strong bearing on nominal GDP growth – expected to keep rising in the coming months after remaining sub-zero for the first seven months of 2023-24, India's growth, without adjusting for inflation, is seen to be higher next year.
Higher nominal GDP growth is essential to improve the centre's finances, considering its committed expenditure – interest payments, salaries, and pensions – is difficult to curtail, while capital expenditure remains a key focus area.
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