Nominal GDP growth has been lower than the budget projection in 10 of 13 years: MC Analysis

Nominal growth estimates of Budget have varied by 0.9 percent from actual numbers

The nominal GDP is likely to miss the Budget projection for growth for the second consecutive year in FY25, according to an MC analysis.

While the government projected 10.5 percent growth for this fiscal year, the nominal GDP growth, according to the first advance estimate released on January 7, was 9.7 percent.

The government projected a nominal GDP of Rs 326.37 lakh crore for FY25, but the first advance estimate puts the number at Rs 324.11 lakh crore.

Analysis shows that the nominal GDP growth has been lower than the budget projection in 10 of the 13 years.

The budget projected nominal growth at 10.5 percent in FY24, but provisional data released in May last year pegged nominal growth at 9.6 percent.

In FY22 and FY23, years characterised by post-pandemic recovery, the budget projection was lower than the actual number by over three percentage points.

Besides, in FY17, the nominal GDP at 11.8 percent was 80 bps higher than the budget projection.

The budget projections do not vary widely from the estimates released by the government.

Analysis shows that barring the four years between FY20-23, when the difference between the budget estimate and GDP number has varied by an average of 6 percentage points, all other years have witnessed an average 0.9 percent diversion between the budget estimate for growth and the final number.

A slippage in nominal GDP weighs heavily on the government’s calculations, especially in reaching its deficit target.

If the government were to achieve its spending and revenue targets in FY25, for instance, a lower nominal GDP could worsen the fiscal deficit to 5 percent of GDP instead of the 4.9 percent it targeted.

However, experts indicate that muted spending, especially on capex, will likely keep the fiscal deficit in check.

“The increase in denominator arithmetically inches the FY25 fiscal deficit to GDP ratio up from the budgeted 4.9% of GDP to ~5.0 percent of GDP, although there will also be some additional drag from lower tax revenues that typically reflect the nominal GDP growth. However, the government is likely to underspend on capex in the revised estimates, which should ensure that the overall fiscal deficit remains on target,” said Nomura economists Sonal Varma and Aurodeep Nandi in a note released on January 8.

According to data released by the Controller General of Accounts on December 31, the government's capital spending was 12 percentage points lower than the previous fiscal year's during the April-November period.

While the government has missed the 10.5 percent target for nominal GDP for the last two consecutive years, economists are pegging the coming year’s growth around 10.5 percent.

“We expect that the budget may assume a 10.5% nominal GDP growth for 2025-26 consisting of 6.5% of real GDP growth…The likely target for fiscal deficit in 2025-26 may be 4.4% of GDP, which may be accompanied by a fall in the debt GDP ratio, thereby confirming continued progress in fiscal consolidation,” said DK Srivastava, Chief Policy Advisor, EY India.