What are India’s GDP Numbers Telling us About its Growth?

Reports from the ground suggest that slackening demand drives the slowdown. In picture, a worker checking the joints used for cement filtration at a manufacturing facility in Kolkata, in 2012. 
| Photo Credit: RUPAK DE CHOWDHURI/REUTERS

While the robustness of the official estimates of the GDP and its growth in India have been questioned, the significant slowdown reported in the advance estimates for 2024-25 is an important signal. Since any bias in the numbers is likely to apply for all years, it is unlikely to impact growth figures. The figures not only project a sharp deceleration in growth, from 8.2 per cent in 2023-24 to 6.4 per cent in 2024-25, but also indicate that, barring 2019-20 and the COVID-19 year 2020-21, this is the lowest rate of growth since 2012-13, matched only by that recorded in 2013-14.

The slowdown has affected all sectors except agriculture, livestock and forestry, and public administration, defence, and other services. It has been argued by experts that in recent years the production of crops such as wheat, pulses, oilseeds, and sugarcane has been overestimated. So, agriculture may not have performed as well as the numbers indicate, and the growth slowdown is likely to have been sharper in reality. It would have even been worse if government spending on a range of services that directly add little to physical output had not risen faster than in the previous year. That is what has raised the GDP contributed by public administration and defence in particular.

What explains this downturn? Reports from the ground in sectors varying from consumer goods to lower-end automobiles suggest that slackening demand drives the slowdown. So unravelling the implications of the slowdown requires examining the factors that are dampening demand.

One factor is the longer-term tendency for “K-shaped” movements in demand resulting from increasing inequality, with demand among the lower and middle classes decelerating while that in the higher income groups rise. In the automobile market for example, demand for sports utility vehicles surged with new models being launched, while that for lower-priced passenger cars lost momentum.

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A second important explanation for the growth slowdown seems to lie in the deceleration of credit-financed spending. Non–food bank credit growth in the period April-September 2024 (at 4.2 per cent) was substantially below the 10.8 per cent registered in the corresponding months of 2023. The deceleration was particularly sharp in lending to commercial real estate and personal housing. The other sector in which lending has registered a significant decline in growth is passenger cars, where too demand has been driven by borrowing. These areas are not just the ones in which debt has played a major role in fuelling spending and demand but are also the ones that made a significant contribution to GDP growth.

This importance of credit in explaining the country’s recent growth cannot be exaggerated. In fact, it is now widely recognised that the spike in growth of the Indian economy after 2003 was a consequence of increase in corporate investment in the infrastructure sector, fuelled by easy access to finance. Awash with liquidity because of a surge in foreign financial flows into India, banks were willing to lend large sums for projects with long gestation lags requiring lumpy investments. That was risky and normally abjured by banks, which mobilised a substantial part of their capital from depositors expecting their holdings to be liquid, with short maturities and low risks. But in search of new markets to lend to, that money was diverted to an area where lending was lumpy and long term. Growth rode on a bubble.

In practice, many of these infrastructural projects failed to take off in time and/or suffered losses leading to defaults on loans, even when they were restructured on more favourable terms. When the banks could no longer postpone provisioning for loans gone bad, leading to losses and the erosion of their capital base, they were forced to reconsider lending to such projects. That soon affected corporate investment and demand.

However, the adverse impact of this on growth was partly neutralised by a compensating increase in lending to the retail sector, especially for housing investments, automobiles, and durable purchases. These loans were most often without collateral, riding on the confidence that the asset financed was itself the collateral and that default rates for lending to these activities were relatively low. As a result, the Indian economy continued to ride on a debt-financed bubble.

But low defaults were the case when the number of retail borrowers was not too large. As the universe of such borrowers expanded to accommodate the lending appetite of the banks, evidence of an increase in defaults of unsecured loans advanced to many of these borrowers emerged. Even the Reserve Bank of India had to issue warnings about the dangers associated with an excess of unsecured loans in the books of the banks.

With defaults rising, banks are now being forced to rethink and hold back on lending to the retail sector as well. That explains the recent slowdown in credit growth with attendant implications for GDP growth. The impact of this would have been sharper if the fiscal conservatism typical of governments adopting a neoliberal agenda had precluded growth in government spending that expanded GDP under the public administration and defence heads. But that increase too has been the result of exceptional financing. Windfall gains from sale of spectrum, special dividends from cash-rich public sector corporations, and huge transfers from the surplus in the books of the (RBI) (amounting to as much as Rs.21,000 crore in financial year 2024-25) have been crucial. But access to resources of that kind is difficult to sustain.

Meanwhile, GST has failed to deliver the promised increase in indirect tax revenues. In the event, even the weak stimulus that government spending within a conservative fiscal framework offers to compensate for the slackening of growth is likely to wane.

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In these circumstances, the government has been looking to exports to drive growth, with ambitions to make India a global manufacturing hub. But the large subsidies being provided to incentivise investors and drive that transition have not helped, while eroding the fiscal flexibility of the government even more.

The structural problems that underlay the stagnation of the late-1960s and 1970s seem to be asserting themselves once again. A revival of growth even in the medium term seems uncertain. The Indian economy seems to be at an inflection point, and the era when it could be claimed that India is the world’s fastest growing nation seems to be nearing its end. 

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts, Amherst, US.