Estimating India’s potential growth rate, Pg6

Key Highlights:

• India's potential growth rate is estimated at 6.5%, but the first quarter growth rate for 2025-26 is estimated at 7.8%.
• Real GDP growth in the first quarter of 2025-26 was 7.8%, lower than the average of 9.9% for the previous three years.
• Real GVA growth in the first quarter of 2025-26 was 7.6%, also lower than the previous three-year average of 9.5%.
• The real Gross Fixed Capital Formation Rate (GFCFR) remained stable at 34.6% in the first quarter of 2025-26.
• The share of the public sector in total real GFCF increased from 21.6% in 2021-22 to 25.1% in 2023-24.

Detailed Insights:

• The Incremental Capital-Output Ratio (ICOR) is volatile, derived from dividing real GFCFR by real GDP growth rate, reflecting growth fluctuations.
• India's real GDP growth rate during 2011-12 to 2023-24 averaged 6.1%, indicating the need to consider longer-term performance in estimating potential growth.
• Increased public sector investment, particularly by the central government, has played a significant role in gross fixed capital formation.
• To increase the potential growth rate above 6.5%, the GFCFR needs to increase by about 2% points, requiring a rise in private corporate sector investment.
• Factors like changing technology (AI, Gen AI) and capital consumption may influence long-term potential growth, balancing each other out.
• A challenging global trade environment and negative contribution of net exports in the first quarter of 2025-26 pose concerns for India's growth.
• Policymakers need to address factors holding back private investment at aggregate and sectoral levels to push potential growth and employment.

Key Concepts Involved:

• Potential Growth Rate: The maximum sustainable rate at which an economy can grow without causing inflation.
• Gross Fixed Capital Formation Rate (GFCFR): A macroeconomic metric describing the net increase in physical assets (investment) within a national economy.
• Incremental Capital-Output Ratio (ICOR): A ratio that measures the amount of investment required to produce one additional unit of output.