Real, nominal GDP growth, inflation play out differently this time around

This happened because inflation, as viewed by GDP deflators, is expected to be quite lower than initially projected for first time, contrary to what had happened ahead of 3 previous interim Budgets

Official projections of real gross domestic product (GDP) growth far exceed the calculations made earlier, and those for nominal economic growth are far less than assumed in the Budget. This has happened for the first time during 2023-24 among four pre-election years.

This happened because inflation, as viewed by GDP deflators, is expected to be quite lower than initially projected for the first time, contrary to what had happened ahead of three previous interim Budgets. 

In fact, there was an exact opposite mix of real GDP growth and nominal GDP growth in the pre-election year of 2008-09 when the United Progressive Alliance (UPA) government was to end its term in a few month's time. Real GDP growth projected in advance estimates was just 7.1 per cent against expectations of 8-8.5 per cent at the beginning of the year. It should be noted that those years did not have two advance estimates but only one since the Budget was presented on the last working day of February. The practice of advance estimates coming in two phases -- one for the purpose of budget presentation and the second one usually presented on February 28 along with the third quarter of a financial year's national account numbers -- started in 2017 when Budget presentation was advanced to February one.

Since the Economic Survey that year (2007-08) refrained from giving economic growth projections for 2008-09, the GDP growth was taken from the April 1 annual monetary policy of the Reserve Bank of India (RBI).

On the other hand, the nominal GDP growth rate pegged by advance estimates was quite higher by 1.9 percentage points at 14.9 per cent for 2008-09 against the Budget assumption of 13 per cent. Even then, the government at that time could not contain its fiscal deficit at a projected 2.5 per cent. In fact, the fiscal deficit rose by a wide margin to six per cent (Revised Estimates -- RE) as the government gave a huge stimulus package by cutting taxes and raising expenditures amid the global financial crisis. 

The next pre-election year of 2013-14 saw both real and nominal GDP growth rates pegged by advance estimates coming below what was projected by the Economic Survey and assumed by the Budget of that year, which could largely be attributed to what was called by the critics as the policy paralysis year of the Manmohan Singh government.

The real GDP growth rate was just 4.9 per cent that year against projections of 6.1-6.7 per cent. The tragedy was that the growth rate was a huge 1.2 percentage points lower than even the lower range pegged earlier. Similarly, the nominal GDP growth rate was 1.1 percentage-point lower than assumed by the Budget. This partly helped the UPA 2.0 government to bring down its fiscal deficit to 4.6 per cent of GDP (RE) against 4.8 per cent projected at the time of Budget Estimates (BE). However, the absolute fiscal deficit was also lower by roughly 18,000 crore or 3.3 per cent. This was largely helped by robust non-tax revenues, which rose due to spectrum proceeds by the telecom companies and huge cuts in revenue and capital expenditures.

The real GDP growth was pegged by first advance estimates to fall in the range pegged by the Economic Survey (see chart) in 2018-19. This, along with higher GDP deflators than expected, led to nominal economic growth being above the Budget assumption (see chart). This partly helped the Centre's fiscal deficit to slip by only 0.1 percentage point to 3.4 per cent (RE) compared to 3.3 pegged in BE even as the deficit widened by Rs 10,000 crore that year (RE compared to BE).

As such, the higher real GDP growth rate and lower nominal GDP growth rate in the first advance estimates for FY 24 than what was pegged by the Economic Survey and assumed in the Budget is peculiar. This was due to the inflation rate as calculated by GDP deflators falling below the Budget assumption for the first time this year among four pre-election years. This is despite the fact that consumer price inflation continued to pinch the common man. This happened because gdp deflators are mostly taken from wholesale prices. The wholesale price index was in deflation for most of the year till December.

The Budget had assumed the nominal GDP would grow by 10.5 per cent during 2023-24, but advance estimates have projected it to expand by just 8.9 per cent.

The result is that the size of the economy would be Rs 296.58 trillion against Rs 301.75 trillion assumed in the Budget for 2023-24.

This meant the GDP would be lower by Rs 5.17 trillion during 2023-24, as calculated by advance estimates against what was assumed in the BE for the year.

It implied that even if the Centre managed to retain its fiscal deficit at the targeted Rs 17.87 trillion, it would be 6.02 per cent against 5.92 per cent, projected in BE for 2023-24.

To contain it at 5.92 per cent of GDP, the fiscal deficit needs to be curtailed further by Rs 31,000 crore to Rs 17.56 trillion.

The government has managed to control its fiscal deficit to Rs 9.06 trillion till November this financial year, which was 50.7 per cent of BE. However, if the fiscal deficit is to be contained to Rs 17.56 trillion, the actual numbers till November constituted 51.63 per cent of the targeted fiscal deficit.

Though this would still be lower than 58.9 per cent till November of the previous year, it would make the task of the government to contain the fiscal deficit at 5.9 per cent of GDP a little more challenging, though not impossible given the leeway the Finance Ministry has in terms of cutting expenditures of those departments and works which do not have absorptive capacity.