Editorial #1 India’s real growth rate and the forecast
Context
India’s real GDP growth rate over the next five years is projected to stabilize at 6.5%. The First Advance Estimates (FAE) of National Accounts for 2024-25 indicate a real GDP growth of 6.4% and a nominal GDP growth of 9.7%. These figures fall marginally short of the Reserve Bank of India’s (RBI) revised projections of 6.6% for real GDP and 10.5% for nominal GDP as stated in the 2024-25 Union Budget.
Performance Overview for 2024-25
The real GDP growth of 6.4% reflects an uneven trajectory, with 6% growth in the first half of the fiscal year and an expected 6.7% in the second half. Notably, the annual growth figure marks a decline from the robust 8.2% growth in 2023-24.
- Gross Value Added (GVA): The decline is less pronounced for GVA, which fell from 7.2% in 2023-24 to 6.4% in 2024-25.
- Sectoral Insights: The manufacturing sector experienced a sharp deceleration, with growth dipping from 9.9% in 2023-24 to 5.3% in 2024-25.
Key Growth Determinants for 2025-26
1. Gross Fixed Capital Formation (GFCF):
The GFCF rate at constant prices has stabilized at approximately 33.4% over the past four years and is expected to remain steady in 2025-26.
2. Incremental Capital Output Ratio (ICOR):
With the average ICOR slightly above 5, maintaining a realistic real GDP growth of 6.5% for 2025-26 is achievable, assuming an ICOR of 5.1.
3. Global and Domestic Demand:
India’s growth will primarily rely on domestic demand, as global economic conditions are unlikely to change significantly.
4. Government Capital Expenditure:
The government’s investment expenditure, which has remained subdued with a (-)12.3% growth in the first eight months of 2024-25, will need a significant boost. Accelerated investment is critical to sustaining growth momentum and spurring private investment.
Nominal GDP and Fiscal Challenges
- Tax Revenue and Growth: The nominal GDP growth of 9.7% in 2024-25 may lead to a shortfall in achieving the budgeted Gross Tax Revenue (GTR) target of ₹38.4 lakh crore if the buoyancy of 1.03 is not maintained. However, with a GTR growth of 10.7% in the first eight months, the revised buoyancy of 1.1 could minimize the revenue gap.
- Capital Expenditure Targets: Despite fiscal constraints, the government can achieve its capital expenditure target of ₹11.1 lakh crore, provided revenue realization remains steady.
Medium- to Long-Term Growth Prospects
India’s real GDP growth rate over the next five years is projected at 6.5%, aligning with International Monetary Fund (IMF) forecasts. This growth is likely to be accompanied by an implicit price deflator (IPD)-based inflation of 4%, leading to nominal GDP growth of 10.5%-11%.
- Potential Growth Peaks: Favorable global conditions and improved net exports could occasionally push real GDP growth to 7%.
- Long-Term Vision: If sustained, these growth rates could position India to achieve developed-country status within the next two and a half decades, with significant improvements in per capita GDP.
Challenges to Sustaining Growth
Achieving a consistent growth rate of 6.5% will become increasingly challenging as the base of the economy expands. While this rate is currently the estimated potential growth, any deviation in global or domestic conditions could necessitate recalibration.
Conclusion
The real GDP growth of 6.4% in 2024-25, though modest compared to 8.2% in 2023-24, aligns with India’s potential growth trajectory. The previous year’s growth can be viewed as an outlier, driven by extraordinary circumstances. The focus must now shift to addressing structural challenges, enhancing investment strategies, and leveraging domestic demand to ensure steady and inclusive economic growth in the medium to long term.
Editorial 2: The multiple layers of the Gaza ceasefire
Context
On January 15, 2025, just days before United States President-elect Donald Trump’s inauguration, Israel and Hamas announced a historic ceasefire agreement over Gaza. The deal, mediated by Qatar, is set to take effect on January 19, 2025. At its core, the agreement involves an exchange of Israeli hostages and Palestinian prisoners, marking a critical juncture in the long-standing Israel-Palestine conflict.
The Stakeholders and Political Dynamics
1. Celebrations in Gaza:
The ceasefire brought a wave of relief and celebration in Gaza, a region ravaged by over 15 months of relentless Israeli military operations following the October 7, 2023, terror attack.
- Hamas has framed the deal as a strategic decision to halt the “genocide” and protect the people of Gaza.
2. Political Maneuvering in Washington:
The United States played a significant role in brokering the ceasefire.
- For Donald Trump: The agreement underscores his narrative of restoring American strength, aligning with his campaign promises.
- For Joe Biden: It represents an attempt to secure a positive legacy before exiting office.
3. Israeli Prime Minister Netanyahu’s Role:
Prime Minister Benjamin Netanyahu’s strategic calculations shaped Israel’s decision to agree to the ceasefire.
- Tactical Alignment with Trump: By endorsing the deal, Netanyahu signals his alignment with Trump, leveraging the latter’s preference for strongman politics.
- Domestic Political Costs: The agreement marks a departure from Netanyahu’s earlier stance of pursuing a decisive victory over Hamas, risking criticism at home for negotiating with Israel’s adversary.
Persistent Challenges in the Israel-Hamas Conflict
1. Diminished Capabilities but Persistent Threats:
While Israeli operations have weakened Hamas and Hezbollah, assessments indicate that Hamas has replenished its ranks with new recruits, maintaining its ideological hostility towards Israel.
2. Absence of a Political Framework:
The ceasefire lacks a robust political track to ensure its longevity.
- Hamas continues to dominate Gaza without integration into a broader, mainstream Palestinian political system.
- Both Hamas and Israel oppose the two-state solution, the globally endorsed framework for lasting peace.
3. Netanyahu’s Strategic Leverage:
Netanyahu may use the ceasefire as a tactical pause. In case of renewed Hamas aggression, he could seek support from Trump to reassert Israel’s military strength.
Rebuilding Gaza: A Multi-Layered Challenge
1. Humanitarian Aid:
The immediate priority is addressing Gaza’s dire humanitarian crisis, characterized by acute shortages of food, medicine, and essential supplies.
2. Political Mechanisms for Reconstruction:
Sustainable rebuilding of Gaza necessitates reimagining Palestinian political structures.
- Arab powers have an opportunity to revitalize the Palestinian Authority, equipping it to function as a legitimate stakeholder in future peace negotiations.
3. Two-State Solution:
Despite being widely regarded as the only viable path to peace, the two-state solution remains a distant reality.
Global Implications and Opportunities
1. Regional Stability:
The sustainability of the ceasefire is critical for broader West Asian prosperity and stability.
- Initiatives like the India-Middle East-Europe Economic Corridor and the expansion of the Abraham Accords hinge on the de-escalation of regional tensions.
2. Arab-Israel Normalization:
Saudi Arabia and Israel’s potential normalization could gain momentum if this ceasefire leads to a durable peace framework.
3. Role of the International Community:
Global actors must actively support mechanisms that ensure the sustainability of the ceasefire, balancing humanitarian assistance with political solutions.
Conclusion
The Gaza ceasefire represents a critical, albeit fragile, step towards de-escalation in one of the most protracted conflicts in modern history. While the agreement addresses immediate humanitarian concerns, its success depends on addressing deeper political and ideological divides. Regional powers and the international community must seize this opportunity to build momentum for long-term peace, fostering regional prosperity and geopolitical stability.
