Editorial 1: India’s real growth rate and the forecast
Context
Over the next five years, the best that India may hope for is a steady real GDP growth rate of 6.5%.
Introduction
The First Advance Estimates (FAE) of National Accounts for 2024-25 show a real GDP growth of 6.4% and a nominal GDP growth of 9.7%. These numbers have fallen short of the Reserve Bank of India’s revised growth estimate of 6.6% for real GDP, as in its December 2024 monetary policy statement and 10.5% for nominal GDP growth as in the 2024-25 Union Budget presented in July 2024.
- The annual growth of 6.4% can be seen as consisting of 6% growth in the first half and 6.7% growth in the second half.
- A clear improvement expected over the Q2 growth of 5.4%. The sharp fall in 2024-25 annual GDP growth from that of the previous year at 8.2% is seen only in the case of GDP.
- With respect to Gross Value Added (GVA), this difference, between 7.2% and 6.4%, is much less.
- On the GVA side, it was the manufacturing sector which suffered a sharp fall in sectoral growth from 9.9% in 2023-24 to 5.3% in 2024-25.
Growth prospects for 2025-26
- Gross Fixed Capital Formation (GFCF) Rate: The Gross Fixed Capital Formation rate at constant prices has ranged between 33.3% and 33.5% during 2021-22 to 2024-25.
- Thus, it appears to have stabilised around 33.4%.
- It is expected to continue at this level in 2025-26.
- Incremental Capital Output Ratio (ICOR):The average Incremental Capital Output Ratio (ICOR) has been marginally higher than 5 in recent years.
- Assuming ICOR to be 5.1 in 2025-26, we may consider a 6.5% real GDP growth to be realistic.
- Global Economy and Domestic Demand: There may not be much change in the global economy even though Donald Trump’s assumption of officemay create more uncertainty.
- India will have to largely depend on domestic demand.
- Government of India’s Investment Expenditure: In particular, the Government of India has to ensure that there is no relaxation in its investment expenditure.
- In fact, the slightly lower growth in 2024-25 is largely linked to the slowdown in the Government of India’s investment growth which has remained negative at (-)12.3% even after eight months into the fiscal year.
- Nominal GDP Growth and Tax Revenue: With a lower nominal GDP growth in 2024-25 of 9.7% as compared to the budgeted nominal GDP growth of 10.5%, the budgeted Gross Tax Revenue (GTR) of ₹38.4 lakh crore may not be realised if the budgeted buoyancy of 1.03 is maintained.
- As per Controller General of Accounts (CGA) data, GTR growth for the first eight months was 10.7%.
- If this growth is maintained for the remaining months also, the realised buoyancy would be about 1.1, which is higher than the budgeted buoyancy.
- In such a case, tax revenue shortfall will be minimal.
- Impact on Fiscal Deficit and Capital Expenditure: In other words, any revenue constraint or likely pressure on fiscal deficit would not constrain the government’s ability to achieve its capital expenditure target of ₹11.1 lakh crore.
Reason for the dip
- Government of India’s Capital Expenditure in 2024-25: After the first eight months, the level of the Government of India’s capital expenditure has remained limited to ₹5.14 lakh crore, which is 46.2% of the Budget target.
- In the remaining four months, the Government of India’s capital expenditure may be accelerated, but it may still fall well short of the target.
- This has been the main reason for the dip in overall real GDP growth in 2024-25.
- Capital Expenditure Plans for 2025-26: Going forward in 2025-26, the Government of India will have to continue to rely on an accelerated capital expenditure growth.
- It can be kept at least at 20% on the revised estimates for 2024-25.
- Sustained government capital expenditures can have a favourable effect on private investment.
- Investment Expenditure Strategy: The size and the pattern of investment expenditure of the government should be designed to accelerate private investment as well.
Medium- to long-term growth prospects
- Projected Real GDP Growth Rate for India (Next Five Years): Over the next five years, the best India may hope for is a steady real GDP growth rate of 6.5%.
- This is in line with the International Monetary Fund’s real GDP growth projection for the Indian economy, which is at 6.5% from 2025-26 to 2029-30.
- Inflation and Nominal GDP Growth: This real GDP growth may be accompanied by an implicit price deflator (IPD)-based inflation of about 4%.
- This would result in a nominal GDP growth in the range of 10.5%-11%.
- Global Conditions and Potential Growth:
- In years where global conditions improve and the contribution of net exports to GDP growth becomes significant, real GDP growth may even touch 7%.
- Long-Term Projections and Per Capita GDP: If a real growth of around 6.5% and nominal growth in the range of 10.5%-11% are maintained over the long run, with an average exchange rate depreciation of 2.5% per annum, India should be able to reach a per capita GDP level consistent with developed country status in the next two and half decades.
- Challenges to Sustaining Growth: Achieving 6.5% growth will be difficult as the base keeps increasing.
- In the earlier years, the growth rate will have to be higher.
- At present, the potential rate of growth appears to be 6.5%, but it can change.
Conclusion
In the light of a potential growth rate of 6.5%, the achievement of 6.4% in 2024-25 should not be considered as disappointing. In fact, the achievement of 8.2% in 2023-24 should be considered as a flash in the pan. The current year’s growth rate of 6.4% as in the first advance estimates should be seen in the context of India’s potential growth rate.
Editorial 2: The multiple layers of the Gaza ceasefire
Context
Despite the complexities, the international community must play its role by pushing for the sustainability of this deal.
Introduction
Just days before the swearing-in of United States President-elect Donald Trump, and a few hours before outgoing President Joe Biden gave his final address to the American people on January 15, 2025, Israel and Hamas announced that the long-elusive ceasefire agreement over Gaza had been struck. The state of Qatar, long stuck in between as a mediator, said the deal was to take effect from January 19, 2025, a day before Mr. Trump takes charge. An exchange of Israeli hostages and Palestinian prisoners is at the centre of this arrangement.
The deck and the cards
- Palestinian celebration in Gaza: The news of the agreement saw Palestinians in Gaza take to the streets in celebration.
- They had faced death and destruction at the hands of the Israeli military whose response to the October 7, 2023 terror attack went on for over 15 months, even as political deadlocks continued.
- Hamas, in a statement, emphasized that the movement “dealt with all responsibility and positivity, based on its responsibility towards our patient and steadfast people in the honorable Gaza strip, by stopping the Zionist aggression against them and putting an end to the massacres and war of genocide to which they are being subjected.”
- Political maneuvering in Washington DC: In Washington DC, Mr. Trump and Mr. Biden reportedly worked in unison to deliver the deal, while both tried to claim credit for it.
- For Mr. Trump, this was a marketable advertising of renewed American strength as promised in his election campaign.
- For Mr. Biden, it is an attempt to salvage his legacy.
- The role of Israeli Prime Minister Netanyahu: The joker in this geopolitical deck is Israel’s Prime Minister Benjamin Netanyahu.
- Amidst perceptions that Mr. Trump would allow Mr. Netanyahu a longer leash to continue his military operations in Gaza, opinion prevailed that anyone but Mr. Biden would be good for stemming the ongoing conflicts and reigning in Israel’s military posturing.
- It is not likely a coincidence that the Israeli leadership agreed to the deal — which, in parallel with Hamas, it has scuttled many times — to send a message of partnership and resolve to Mr. Trump.
- Netanyahu’s political strategy: Why Mr. Netanyahu would go out of his way to court Mr. Trump, even after being invited by the Republicans to address a joint session of Congress in July 2024, has a simple answer: Mr. Trump prioritises personality over policy.
- Agreeing to this deal with Hamas offers Mr. Trump a victory at potentially big domestic costs for Mr. Netanyahu.
- For long, Mr. Netanyahu has maintained that only a complete victory over Hamas is acceptable.
- With this deal, he becomes an Israeli Prime Minister who has cut a political settlement with the arch foe, but without a complete elimination of Hamas.
On Hamas and Israel
- Diminished Capacities of Hamas and Hezbollah: There is no doubt that Hamas and Hezbollah in Lebanon have had their capacities diminished over the past year due to leadership decapitation operations conducted by Israel.
- Recruitment of New Militants by Hamas: Outgoing U.S. Secretary of State Antony Blinken has stated that assessments show Hamas has recruited as many new militants as it has lost.
- Lack of a Political Track for Ceasefire:
- The lack of a political track acting as insurance for the ceasefire remains a concern.
- Hamas is expected to continue to be in control of Gaza in the future, as no significant movements have been made to reorganize Palestinian politics to bring the group under a wider, more mainstream Palestinian-led political ecosystem.
- Hamas’ iteadfast Ideology: Hamas will remain steadfast in its ideology against Israeli security and sovereignty.
- Hamas and Israel continue to remain on the same page against a two-state solution, despite a global push for it as the only viable option for lasting peace.
- Netanyahu’s Strategy with Hamas: The prevailing situation of the status quo, despite the ceasefire, can be leveraged by Mr. Netanyahu if Hamas resumes attacks against Israeli territories and populations.
- In such a scenario, Mr. Netanyahu will be able to approach Mr. Trump from a vantage point, having agreed to the Hamas deal.
- A return to retaliatory tactics will likely come with the full support of Mr. Trump, manoeuvring Israel’s position back to one of strength, as it was under Mr. Biden.
- Trump’s Stance on Hostages: Mr. Trump has previously stated that there would be ‘hell to pay’ for Hamas if Israeli hostages, including American citizens, are not released.
Gaza and its rebuilding
- Critical aid to Gaza: Beyond the political intricacies of this ceasefire arrangement, the most important deliverable would be critical aid to the people in Gaza.
- Food and medical shortages have surpassed criticality long ago.
- Rebuilding Gaza and political mechanisms: Beyond the aid front, the rebuilding of Gaza may be a premature discussion until alternative political mechanisms are envisioned within the Palestinian fold.
- Opportunity for Arab Powers: This is where the Arab powers have an opportunity to exert influence.
- They can seek a remoulding, re-shaping, and revitalisation of the Palestinian Authority to better equip Palestinian politics as a core stakeholder for a challenging future.
- Two-State Solution: The much sought-after two-state solution remains a distant reality.
Conclusion
Finally, the international community must also play its role to push for the sustainability of this deal. The future of West Asian prosperity, newer geo-economic architectures such as the India-Middle East-Europe Economic Corridor, a potential expansion of the Abraham Accords, and even the radicalism of a Saudi Arabia-Israel normalisation, ultimately hinges on this momentum. At the end of the day, the management of regional geopolitical fissures by regional powers will determine all outcomes.