Finance Ministry may assume nominal GDP growth at 11% for FY25

NEW DELHI : The Finance Ministry may peg nominal gross domestic product (GDP) growth at around 11 percent for the next financial year, about 50 basis points higher than the estimate for 2023-24, a government official told.

This assumption is on account of initial estimates that real GDP growth may touch 7 percent in 2024-25, while the GDP deflator should not be less than 4 percent, the official said on the condition of anonymity.

“Investments are expected to increase from the private sector as well, so that could fetch a growth of about 7 percent for FY25. If consumption stays strong then it will also induce producers to increase their production of goods and services on the same capacity,” the official added. 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 remained in the deflationary zone for the seventh month in a row in October, coming in at -0.52 percent, data released by the commerce ministry on November 14 showed.

The nominal GDP growth assumption is one of the most crucial numbers in the Union Budget, as it determines estimates such as the fiscal deficit and the growth in tax collections. A higher nominal GDP figure versus the budgeted figure could mean that the central government’s tax mop-up for 2023-24 may be better than the projections in the annual financial statement, granting greater leeway to the Centre in meeting its fiscal deficit target.

Budget targets
Recently, questions have emerged on the Centre’s ability to meet its Budget targets for 2023-24 with nominal GDP growth slowing down. The central government has pegged a nominal GDP growth of 10.5 percent for the current fiscal.

Data released on August 31 showed India’s nominal GDP growth cooled to 8 percent – the lowest in nine quarters. The last time India’s nominal GDP grew at a slower pace was when it rose by 6.3 percent in October-December 2020 – the year that was hit the most by the Coronavirus pandemic.

The primary reason behind slower nominal GDP growth is the Wholesale Price Index (WPI)-led inflation being in the negative territory for seven months now. However, economists expect the deflationary trend in WPI to end in the coming months.

Real GDP growth
According to the official, with real GDP growth expected to surprise on the upside during the current fiscal, the impact of the fall in WPI on nominal GDP estimate is likely to be limited.

“Growth (Real GDP growth for FY24) could be higher than 6.5 percent and that helps our nominal GDP projection. The outer limit is 7 percent and it could touch that. Growth could be higher since high-frequency indicators like IIP (Index of Industrial Production) and core industry are showing robust growth. PMI (Purchasing Managers’ Index) has seen some reduction but, on average, it has been in expansionary mode. Air travel, hotel rates and occupancies are high,” the official said.

India’s GDP growth for July-September is likely to come in at 6.8 percent, according to a survey of 17 economists. This is 30 basis points higher than the Reserve Bank of India’s (RBI) forecast of 6.5 percent. In fact, economists from the central bank have made note of the “wide consensus” that GDP growth will outperform the RBI’s projections.

The statistics ministry will release GDP data for July-September 2023 at 5:30 pm on November 30.

The Economic Survey for 2023 projected real GDP growth for the current fiscal in the range of 6-6.8 percent, “depending on the trajectory of economic and political developments globally”.