Economy
GDP slowdown? First estimate is not the last word: What past data shows
Summary
- GDP estimation undergoes several revisions over a period of time but the first advance estimates form the basis of projections in the Union Budget, presented in early February.
The Indian economy is expected to grow at 6.4% in 2024-25, according to the first advance estimates released by the statistics ministry on Tuesday, the slowest since the pandemic-hit year of 2020-21. This, coupled with nominal GDP growth anticipated to remain below 10%, poses challenges for the upcoming Budget exercise. However, these initial estimates are often revised significantly in subsequent releases and have historically tended to underestimate actual growth, according to a Mint analysis.
The disappointing 5.4% growth in the July-September quarter has weighed heavily on the full-year outlook, despite expectations of a rebound in the second half. A preliminary calculation suggests that the estimates assume a 6.7% growth rate for the second half of the year.
The full-year GDP growth projection is calculated three months before the fiscal year ends, with the statistics ministry extrapolating data based on economic trends observed during the first six to nine months. "The bias in the first advance estimate is tied to the economy's performance in the first half of the year, with weaker growth leading to a lower overall number and stronger growth resulting in a higher figure," said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership.
“However, the latest advance estimate may not have a strong upside bias this time despite weak growth in the first half because statistics ministry has accounted for better growth in government spending and agriculture already," Upadhyay added.
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While GDP estimates are revised multiple times over the year, the first advance estimates play a crucial role as they serve as the foundation for projections in the Union Budget, presented in early February.
Budget bug
The nominal GDP growth rate is a key metric for the Budget exercise, as it directly influences the fiscal deficit ratio. A higher nominal GDP estimate lowers the fiscal deficit as a percentage of GDP, while a lower estimate has the opposite effect. For 2024-25, the statistics ministry has projected nominal GDP growth at 9.7%, down from the 10.5% estimated in the Union Budget presented in July.
A lower nominal growth rate would impact the fiscal deficit ratio as well as the projection for 2025-26. However, the Centre is expected to miss its capital expenditure target for the year by about ₹1 trillion, which will help offset the impact of the lower nominal GDP and may result in only a marginal slippage in the fiscal deficit, economists said.
“From the budget perspective, the nominal GDP growth is lower than the budgeted levels, leading to minor slippage risk of ~0.05% of GDP," said Kanika Pasricha, chief economic adviser, Union Bank of India.
Based on the nominal GDP growth projection for 2024-25, the Union Budget will give its nominal GDP growth projection for 2025-26 and peg its revenue and expenditure plans accordingly.
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As per latest available estimates, nominal GDP growth was less than 10% in 2023-24 as well, potentially making a 10%-plus projection optimistic. Should the government project a lower nominal GDP growth figure, its space for expenditure and revenue projection will get crimped.
Revision reset
The first advance estimates will go through four rounds of revisions: the second advance estimates in February of the same year, provisional estimates in May, the first revised estimates in February next year, and the second revised estimates a year later. Earlier, the statistics ministry also released third revised estimates, but this practice was discontinued to reduce confusion caused by frequent revisions.
As GDP figures are revised over time, they provide a clearer and more accurate picture of India’s economic performance. For instance, in 2020-21, the first advance estimates projected a contraction of 7.7%, reflecting the sharp decline in economic activity during the nationwide lockdown in the first half of the year. However, the final estimate showed a smaller contraction of 5.8%, as economic activity rebounded rapidly once restrictions were eased.
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Revisions in GDP figures between the first advance estimates and the final estimates have occurred in both directions—upwards and downwards. A Mint analysis reveals that real GDP growth has been revised higher more frequently than lower between 2016-17 and 2023-24. In two of these eight years, the upward revisions exceeded 100 basis points. For nominal GDP growth, the revisions were evenly split, with four years showing upward adjustments and four showing downward ones.
The incomplete picture provided by the first advance estimates often restricts the Centre's spending capacity in the Budget. A Mint analysis indicates that if the Centre had access to the final estimates, it could have spent an additional ₹60,000 crore in at least three years between 2016-17 and 2021-22.
However, given the inherent limitations of the first advance estimates, the government will need to navigate the numbers released on Tuesday, even though they are highly likely to undergo significant revisions over the next two years.
