India’s economic momentum is slipping, with nominal GDP growth for 2024-25 projected at 9.7 per cent, the lowest since Prime Minister Narendra Modi took office in 2014.
The revised forecast, down from 10.5 per cent in July, reflects a ₹2.25 trillion shortfall in projected output, as the economy grapples with shrinking consumption, weak wage growth and sluggish private investment.
Despite the slowdown, finance minister Nirmala Sitharaman is sticking to her fiscal consolidation road map, targeting a fiscal deficit of 4.5 per cent of GDP by FY26.
However, the trade-off between maintaining growth and tightening fiscal discipline is becoming increasingly stark, with economists warning that aggressive deficit cuts could deepen the slowdown.
India’s GDP growth slumped to a two-year low in Q2 of FY25, with nominal growth in Q3 hitting a post-pandemic low of 8 per cent. Consumer confidence is weak, household savings have fallen and discretionary spending remains muted.
Capital expenditure (capex), a critical driver of infrastructure-led growth, has lagged. Between April and November 2024, the government spent only ₹5.13 trillion of its ₹11.1 trillion capex budget — 46.2 per cent of the total compared with 58.5 per cent during the same period last year.
Revenue streams have also been under pressure. Net tax revenues grew a meagre 0.5 per cent in the first eight months of 2024-25 due to frontloaded devolution to states, while non-tax revenues got a one-time boost from the Reserve Bank of India’s dividend payout.
Revenue expenditure, which includes fixed obligations such as subsidies, salaries, and pensions, grew just 1 per cent year-on-year in November, leaving limited fiscal space to support growth-oriented initiatives.
The government’s fiscal discipline goals have drawn criticism from economists who argue that tighter consolidation could stifle the fragile recovery. “India cannot afford fiscal austerity at this juncture,” said Lekha Chakraborty of the NIPFP. “Weak consumer confidence and uncertain demand are holding back private investment. Fiscal policy must remain accommodative to revive growth.”
Private capital expenditure is yet to pick up meaningfully, with companies holding back investments amid concerns over future demand. Economists stress that public spending is crucial to crowding in private investment, yet the slowdown in capex and persistent constraints on revenue expenditure raise questions about the government’s ability to boost demand.
The debate over stimulating consumption is intensifying. While some experts advocate income tax cuts to increase urban disposable incomes, others question their effectiveness, given that only 2 per cent of India’s population pays direct taxes. “Capital expenditure is far more effective at creating jobs and stimulating growth than tax cuts,” said Gaura Sengupta, chief economist at IDFC First Bank.
Rajini Sinha, chief economist, CareEdge said: "Post pandemic the government has focused on an investment led recovery. However, now with growth moderating they should look at providing consumption stimulus. The government should look at measures to boost consumer sentiments and spending. A meaningful pick up in consumption will also help improve private investment. The Union budget should look at a reduction in income tax across all tax slabs, to provide a meaningful thrust to consumption."