India's economic performance for the fiscal year 2023-24 presents a tale of two metrics: robust real growth tempered by a significantly slower nominal expansion. While the real Gross Domestic Product (GDP) grew at a faster-than-anticipated 7.6%, the nominal GDP growth was nearly halved to an estimated 9.6%, primarily due to lower inflation. This divergence carries significant implications for the government's fiscal math and economic perception.
The Real vs. Nominal Conundrum
The core of the story lies in the distinction between real and nominal GDP. Real GDP measures the value of goods and services produced, adjusted for inflation, reflecting actual physical growth. Nominal GDP is the raw monetary value, unadjusted for price changes. For FY24, the high real growth of 7.6% indicates strong underlying economic activity. However, the Wholesale Price Index (WPI)-based inflation remained near zero or negative for much of the year, drastically pulling down the nominal growth figure from earlier projections of around 10.5%.
This scenario creates a unique challenge. As noted by economists, government revenues like taxes are linked to nominal GDP. The lower-than-budgeted nominal expansion means that key fiscal ratios, such as the fiscal deficit as a percentage of GDP, may appear larger. The government had initially pegged nominal GDP growth at 10.5% for its budget calculations. The actual 9.6% figure, while still healthy, necessitates a recalibration of these assumptions.
Economists Decode the Implications
Leading economists have provided nuanced readings of the data. Aditi Nayar, Chief Economist at ICRA, pointed out that the nominal GDP growth for FY24 is likely to settle around 9.6%, which is a full percentage point lower than the budget estimate. This, she explained, will cause the central government's fiscal deficit to print at 5.9% of GDP, slightly above the targeted 5.8%, unless expenditure is curtailed.
DK Srivastava, Chief Policy Advisor at EY India, highlighted the positive side of strong real growth but confirmed the pressure on nominal figures. He emphasized that the government's tax buoyancy, which was expected to be high, might see some moderation due to this nominal GDP slowdown. The consensus among experts is that while the economy's fundamental health is strong, the fiscal arithmetic for the year requires careful monitoring.
Looking Ahead: Fiscal and Economic Outlook
The divergence sets the stage for the upcoming full budget for FY25, expected in July. The government will need to base its new fiscal targets on a realistic assessment of nominal GDP growth. Economists suggest that with inflation, particularly WPI, expected to remain moderate, nominal growth may continue to trail real growth in the near term.
This dynamic presents a mixed bag. On one hand, strong real growth signals resilience and productive capacity in the Indian economy, attracting long-term investment. On the other, slower nominal growth can impact corporate earnings in rupee terms, wage growth perceptions, and the pace of debt reduction relative to the size of the economy. The key for policymakers will be to navigate this environment by supporting sectors that drive real growth while managing fiscal priorities prudently.
In summary, India's FY24 economic report card is one of solid performance in real terms, shadowed by the mathematical squeeze of low inflation on nominal values—a crucial factor that will shape the country's fiscal and economic discourse in the coming months.
