NEW DELHI: The interim Budget for 2024-25 could peg India’s nominal GDP growth for the next financial year at 10.7% or thereabouts, going by the median of a poll of 15 economists.
The estimates for nominal GDP growth for the next fiscal range from 9.5% to 11.3%, with most economists expecting the figure at 10.5%. “With the base effect propping up wholesale inflation, nominal GDP growth could be higher in FY25,” said Sakshi Gupta, principal economist, HDFC Bank. Gupta sees real GDP growth at 6.3% in FY25, and CPI and WPI inflation, respectively, at 4.7% and 6.5%.
The nominal GDP assumption holds significance as based on this estimate the Budget pegs its fiscal deficit target for a financial year.
In the current year, the Budget had assumed nominal GDP growth at 10.5% and fiscal deficit at 5.9% as percentage of GDP. However, the first advance estimate, released earlier this month, projected nominal GDP to grow merely 8.9% – as a consequence, the fiscal deficit may come in at 6.0%, if it remains unchanged in absolute terms at Rs 17.87 trillion.
However, given a higher-than-estimated growth in tax revenues, the deficit could be contained at the BE level as a fraction of GDP. WPI inflation carries dominant weight in the GDP deflator, which is a ratio of current price GDP to the constant price GDP, and is an indicator of the rate of inflation in the economy. Higher WPI inflation increases the deflator, and thereby the nominal GDP growth, and conversely, a lower value depresses growth.
The lower than Budgeted nominal GDP growth in the current year is a direct result of WPI staying deflationary in the first nine months of FY24. In April-December, WPI inflation averaged (-)1.07% as against 11.69% in the comparable period of FY23. CPI inflation on the other hand, averaged 5.5% as against 6.8%.
However, as the support from base effect wanes, WPI is expected to stay inflationary in the entire FY25. “Based on our forecast of 12% growth in total receipts in FY25, total spending could grow anywhere between 6-8% to achieve a fiscal deficit target of 5.2%- 5.4% of GDP, assuming nominal GDP growth of 10.5%,” said Nikhil Gupta, chief economist, Motilal Oswal Financial Services.
“Since the economic growth is very strong at this point in time, we feel that this is the best opportunity for the government to consolidate faster and thus, recommend a fiscal deficit of 5.2% of GDP in FY25,” he said.
Economists say that a target of 5.2% in FY25 would increase the possibility of the government meeting its fiscal deficit target of 4.5% as a percentage of GDP in FY26. Whereas, the target of 5.3-5.4% may push the target ahead by one more year.
Source: The Financial Express
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