The GDP growth in the fourth quarter of 2024-25 at 7.4 per cent and growth for full year of 2024-25 at 6.5 per cent have exceeded the consensus expectations making the immediate impact of global tariff war not consequential for India.
Higher Q4 growth has largely been fuelled by impressive growth in fixed capital formation. Overall average GDP growth of 6.14 per cent from 2012-13 to 2024-25 has only been a shade lower than private final consumption expenditure averaging 6.18 per cent and a shade higher than gross fixed capital formation of 6.07 per cent.
This indicates that growth in GDP has broadly been aligned with its two most important components, private consumption and fixed capital formation and a sticky Incremental Capital Output Ratio (ICOR).
Resilient economy
Long-term trends indicate that the Indian economy is resilient to shocks generated internally and occasionally globally, but its long-term growth is also likely to remain range bound and under 6.5 per cent per annum. We examine here acceleration in growth, structural shifts in consumption, sectoral share in production and investment.
Rising growth and consumption expenditure are interrelated and independent of lead and lag and one feeds the other. But sectoral shifts in consumption have welfare and distributional implications.
Between 2011-12 and 2023-24, there has been a decline in share of expenditure on food and non-alcoholic beverages from 30.4 per cent to 26.4 per cent, while there is a corresponding increase in share of expenditure on education, health, transport & communication from 24.8 per cent to 31.4 per cent, indicating a shift towards capacity development.
The consumption of bottom 30 per cent of population has increased from 14.5 per cent to 15.8 per cent and Gini coefficient declined only marginally. Though various studies indicate a sharp decline in poverty ratio (particularly extreme poverty), there is hardly any significant increase in consumption share of bottom 30 per cent of population, despite a moderately relatively higher growth and direct transfers.
The sectoral share in GDP since 2011-12 has also not changed significantly. While there has been a decline in the share of agriculture & allied activities from 18.5 per cent in 2011-12 to 14.1 per cent in 2024-25, this decline in share has shifted to services, particularly professional services rather than to manufacturing or basic services of health and education.
Manufacturing which has been conceived as the lead sector for employment generation has not seen a breakthrough in share increase despite special emphasis on this sector. The share of manufacturing continues to be stagnant at around 17 per cent in gross value added.
Increase in share of professional services is driven by various factors and their spillover effect on the rest of the sectors is hardly significant. We note that the share of financial services, with increase in banking and financial penetration remains stagnant at 6 per cent. Construction, despite an emphasis on infrastructure and civic amenities including housing, has seen its share witnessing a moderate decline.
Capital formation
The story with regard to the sectors’ share in gross capital formation over the years is not different. While the share of agriculture & allied sectors in gross capital formation has narrowly moved in the range of 8-8.5 per cent, there has been an increase in the share of capital formation in communication services from around 1.7 per cent in 2011-12 to close to 5.7 per cent in 2023-24.
Contrary to expectations, the share of capital formation in manufacturing (from 19.2 per cent in 2011-12 to 16.1 per cent in 2023-24) and professional services (from 25.5 per cent in 2011-12 to 18.7 per cent in 2023-24) has moderated considerably.
For manufacturing services, this is consistent with declining R&D share of GDP since 2008 and supply chain constraints due to rising tariff walls. Despite share of GDP increase of professional services, fall in capital formation leads to possibility of predominance of low technical level of professional services. There has been a sharp increase in the share for other services comprising primarily education and health from 4.7 per cent to 8 per cent, which is bound to raise their quality of outcomes.
The three sectoral distributions of consumption, GDP and capital formation suggest an uncertain pattern. The sectors whose share in GDP is increasing are witnessing a decline in the share in capital allocation indicating either there was excess capacity earlier or the entrepreneurs see an uncertain future.
In construction and transportation, where one would like to see greater capital penetration because of logistic concerns, but there is also lesser allocation of capital. We see the same in the crop sector.
While the expectations are for a moderation in labour absorption in agriculture, capital formation does not seem to be growing at any significant rate. All these are bound to impact productivity, growth and income in the economy.
Data suggest Indian economy is at a crossroads with clear signs of welfare changes (in terms of changing consumption of commodities or in terms the share of bottom 30 per cent), innovation and emerging sectors (a stagnant share of manufacturing with poor R&D expenditure and critical infrastructure) and acceleration in growth (in terms of stagnant or declining shares in manufacturing, professional services). Policy options in such a situation are not unambiguous.
During the planning era, directions were provided from the top and policy paradigms were appropriately adopted. In the changed scenario, there are multiple choices — manufacturing or services; large oligopolistic structure which could globally compete or MSMEs; institutional finance led or debt free conglomerates;mom-pop stores or e-business; agriculturally dominated workforce or a more diversified empowered one; a 30 per cent labour force in 15-29 age group waiting to be absorbed in salaried jobs or entrepreneurship.
Question is not of either and or, but of a judicious mix of all. In this situation, it is for the Government to take a lead in accelerating investment, especially private investment, improving capacity creation, emphasising deregulation, improving credit to micro sector for capital formation, reducing tariff walls and reorienting its own expenditure.
Gopalan is former Secretary, Economic Affairs, and Singhi is former Senior Economic Adviser, Ministry of Finance. Views expressed are personal
The sectors whose share in GDP is increasing are witnessing a decline in the share in capital allocation, indicating that either there was excess capacity earlier, or the entrepreneurs see an uncertain future