India may inch closer to its target of 6.5% real GDP growth in FY24, but economists contend that nominal growth may be lower than budgeted, challenging the fiscal math and pushing the target to become a $5 trillion economy by another year.
Subdued wholesale inflation may keep nominal GDP growth at least a percentage point below the Union Budget estimate of 10.5% in this fiscal year, according to experts.
“Our estimate of nominal FY24 GDP growth is tracking at 9% with downside risk,” said Gaura Sengupta, economist, IDFC First Bank. She predicted wholesale inflation to average 0.2% this fiscal, compared with 9.6% in the previous year.
Wholesale price index, which forms 70% of the GDP deflator used to calculate nominal GDP, was in deflation for the fifth consecutive month in August, according to data released last week.
WPI-based inflation fell 0.52% in August as against 1.36% deflation in July.
Experts contend that WPI would move into positive territory from September as the base effects fade but say that inflation is expected to stay low for the rest of the fiscal.
CareEdge, a rating agency, predicts wholesale inflation to average 1-2% in FY24.
Fiscal Math
Sengupta indicated that the effects of subdued nominal growth are reflecting in tax collections.
“The impact of the slowdown in nominal GDP growth is already visible with gross tax collection growth slowing to 2.8% YoY in FYTD24 (Apr to Jul), with a decline in corporate tax collections and a slowdown in income tax growth. Even GST tax collections where compliance is improving, a slowdown is seen in nominal growth rates to 11% in FYTD24 (Apr to Aug) from 33% in FYTD23,” Sengupta said.
While Sengupta hopes the government will meet its 5.9% fiscal deficit target with expenditure moderation, others contend that low or negative wholesale price growth may prevent that.
“If it (nominal growth) comes closer to real growth of 6.5%, then deficit ratios will go up by up to 0.2 percentage point,” said Madan Sabnavis, chief economist at Bank of Baroda.
In the first quarter of FY24, nominal GDP growth was just a tad higher at 8% compared with the real growth of 7.8%.
Another challenge, Sabnavis says, is the delay in meeting the $5 trillion economy target.
“This (6.5% nominal growth) will push forward the year when we can hope to touch the $5-trillion mark,” he noted.
The IMF predicted that India would become a $5 trillion economy and surpass Japan as the world’s third-largest economy by 2026-27.
Sabnavis expects nominal GDP to grow at 8-9% in FY24.
