FY25 nominal GDP growth assumed at 10.5%, meets expectations

The 2023-24 Budget had also assumed a nominal GDP growth rate of 10.5 percent for the fiscal calculations.

The Union government has assumed a nominal GDP growth of 10.5 percent for 2024-25, the interim Budget presented by Finance Minister Nirmala Sitharaman on February 1 showed.

"Nominal GDP for BE 2024-25 has been projected at Rs 3,27,71,808 crore assuming 10.5 percent growth over the estimated Nominal GDP of Rs 2,96,57,745 crore as per the First Advance Estimates of FY 2023-24," the Budget documents said.

The number is in line with expectations, with a Moneycontrol poll of economists  predicting that the finance ministry would assume a nominal GDP growth of 10.5 percent for next in its Budget calculations.

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 number – and, consequently, a higher nominal GDP – can make the fiscal deficit smaller as a percentage.

After two years of very high nominal growth – thanks to high inflation and a favourable base – in 2021-22 and 2022-23 helped the Centre rapidly bring down its fiscal deficit from 9.2 percent in 2020-21, nominal growth in 2023-24 fell sharply to 8.9 percent as per the statistics ministry's first advance estimate. This is well below the 10.5 percent the finance ministry had assumed in the 2023-24 Union Budget. Normalisation of the base effect and the key Wholesale Price Index (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 higher next year.

Higher nominal GDP growth is essential to improve the Centre's finances considering its committed expenditure – interest payments, salaries, and pensions – are difficult to reduce, while capital expenditure remains a key focus area.

In her Budget speech, the finance minister surprised one and all by targeting a fiscal deficit of 5.1 percent of GDP for next year, well below expectations of 5.3 percent.