Govt Must Keep Pedal Pressed On Public Expenditure: Economist DK Joshi On Economic Slowdown

India’s gross domestic product (GDP) estimates for the financial year 2024-25 (FY25) have been maintained at 6.4% by the Ministry of Statistics. The State Bank of India on Wednesday put it at 6.3%. This is significantly lower than the 8.2% GDP growth reported in the previous financial year 2023-24.

“A gradual slowdown was expected, but it turned out to be sharper than expected earlier because of the second-quarter surprise,” DK Joshi, Chief Economist at Crisil Ratings told The Core Report podcast.

A formal government release said despite a dull first half of the financial year 2025, an uptick in agricultural and industrial activity was expected, along with resilient rural demand in the second half to keep India on a growth path towards achieving a 6.4-6.8% expansion by the end of the financial year.

“Real GDP has been estimated to grow by 6.4% in FY 2024-25, compared to the growth rate of 8.2% in Provisional Estimate (PE) of GDP for FY 2023-24. Nominal GDP has witnessed a growth rate of 9.7% in FY 2024-25 over the growth rate of 9.6% in FY 2023-24,” the Ministry of Statistics and Programme Implementation said in its official release.

The agriculture and allied sector showed a significant improvement, with Real GVA growth estimated at 3.8% in FY25, a marked increase from the previous year's 1.4%.

Other sectors expected to grow are the financial, real estate and professional services sectors. The construction sector's Real Gross Value Added (GVA) is projected to rise by 8.6%.

The good news could be that Private Final Consumption Expenditure (PFCE) at constant prices has experienced a growth of 7.3% in FY25, a significant increase compared to the 4% growth in the previous year.

In the interview, Joshi also said that the decline in government capital expenditure, a key driver of post-pandemic recovery, during the second quarter, is unlikely to be compensated for in the rest of the fiscal.

Edited excerpts:

Are the growth numbers of any surprise?

Well, not really. After the second quarter GDP came in at 5.4%, I think immediately following that, a lot of professional forecasts cut their numbers down. Even the RBI (the Reserve Bank of India) cut its forecast from 7.2% to 6.6%. It has come in even below that. A gradual slowdown was expected, but it turned out to be sharper than expected earlier because of the second-quarter surprise. But overall, this wasn't a surprise.

If you were to go a little deeper, one of the things that seems to be standing out is that agricultural growth and some parts of industrial growth have done better. So, therefore, what's slowing down?

Agriculture did well. Last year, agriculture did not do well. So the base effect is playing out. Actually, agriculture should have grown even faster. I think if the monsoons and the weather had been perfectly normal. The slowdown is in investments. We all know that investments are being led by government investments and also by household investments.

We don't have the details, but we know that the government investment did slow down in the first half of the year. And I think that it's not easy to make up for that in the second half completely. Investments will pick up, but they won't make up.

Compared to the budget, you are going to end up with lower investments in this fiscal year. And since that was the important driver, that also is behind the slowdown. The other factors like interest rate hikes keeping into some part of the demand in urban areas, high inflation leading to some consumption slowdown in some categories.

I think all that was on the expected lines, but the sharper slowdown was largely due to the investment slowdown.

On the other hand, you've also pointed out that private consumption has done well. And this, of course, seems to be unlike previous quarters and years.

Private consumption has grown at 7.3%, which is above the GDP rate of growth, which is 6.4. But if you look at what happened last year, the base effects become an important driver of activity at times, just as higher than the trend rate of growth in overall GDP last year is also a factor which led to a slowdown because you can't maintain that high rate of growth.

Similarly, last year we saw private consumption growth at only 4%. So over that, I think part of it is the base effect and part of it is the revival of rural consumption.

I think both of them have led to higher private consumption growth, which is about 60% of the GDP. So I think part of the rebound in consumption is the base effect. I think that's the point I wanted to highlight. That is why it has grown faster than GDP.

If you look at investment, which was the driver of growth until now, it has grown as fast as the GDP. Private consumption has grown faster than the GDP.

But that in turn has been driven by rural consumption rather than urban, which continues to be muted.

Rural consumption and base effect.

Urban consumption continues to be slow or muted.

Relatively slower. I mean, those are the indicators because even the RBI survey tells us that consumer confidence is a little muted and they measure consumer confidence only for urban areas.

When we say that GDP slows down, in this case, let's say from an anticipated 7.5% to 6.5% or thereabouts, what could it mean tangibly?

I won't call it a slowdown, a sharp slowdown at all. I mean, this is just a moderation in growth to the trend levels, I think, which is a trend. We estimate the trend or the potential at around 6.7%. So from the above trend, it has come back closer to the trend this year. I think that's how I would interpret it. And also, while interpreting these numbers, one should remember that these are the first advanced estimates.

I think they are made available, particularly for help in the budgetary process. And they only account for three-quarters of the data that is available. So if the fourth quarter surprises, either way, the numbers can change. So I think one needs to keep that also in mind.

However, I think we'll need to see how the second advance estimates will come out in February. But one needs to keep this perspective in mind. I think these are based on partial information.

We're not saying it's a sharp slowdown, but if from a projection of 7.5, it becomes 6.5, something changes in the economy.

Yeah, investments slowed down. So I think that is the whole point. I think the private investments are still tepid and the government investment slowed down faster than I think we were expecting.

I think that the lesson from this for the forthcoming budget would be that I think we need to maintain the thrust on public investments even in the coming budget because it's playing an important role. The spending from the government on infrastructure has higher multiplier effects. It is also helping you over time to bridge the infrastructure gap that we have in the economy.

That is the lesson that I will draw from that overall investment slowdown is because of public investment. And since private investment is not forthcoming the way it should, given the conditions, it's important for the government to keep the pedal pressed on the public expenditure. And I think the slightly good news is that private consumption has somewhat revived.

I think I'm not talking about the distribution, but overall, I think the private consumption data shows have revised quite markedly.

Would there be any way of knowing what that private consumption is typically or otherwise?

Not from this data. I think this data is totally aggregated. And I think so private consumption has both the services element and the goods element. It is also by different income classes.

I think we only have proxy indicators for that. We don't really know how it has behaved, except that I think auto was doing well last year. This year it is slowing down. Services consumption seems to be doing reasonably well. Services growth is also quite strong, I would say.

So I think these are the broad conclusions you can draw. Very specific detail, I think you need to do more work on the information that is available, proxy information.

If you were to look at previous years and the advanced estimates that are released, let's say in this case, the first week of January, do they usually end up being the same? And what is the likelihood of change, if so, in any direction?

What can change the estimates positively is that if government investment actually picks up very swiftly in the last quarter, I think that can create an upside. If it doesn't do that, can create a downside.

That's one way of looking at it. And when the COVID happened, I think there were other factors, how would COVID play out and so on. So actually, the point is that the more reliable estimate will not even be the second advanced estimate, but one that comes after that.

I think sometimes you find that there's not much change, but sometimes there is change also. So I think it depends on specific circumstances. This year, I don't expect much change.

I mean, so if you were to ask my opinion, I would expect GDP growth of around 6.5%, I think.