The first quarter actual GDP development within the post-COVID-19 years, from 2022-23 to 2024-25, has averaged 9.9% as in comparison with corresponding common ranges of the second, third and fourth quarters of seven.0%, 6.9% and seven.5%. Thus, a 7.8% actual GDP development within the first quarter of 2025-26 is beneath the typical for the primary quarter of the earlier three years. The annual actual GDP development charges for 2022-23 to 2024-25 had been at 7.6%, 9.2% and 6.5%, respectively.
On the output aspect, actual GVA development within the first quarter of 2025-26 was 7.6%. This was additionally decrease than the corresponding common GVA development of 9.5% within the earlier three years. The GVA development within the first quarter of 2025-26 was largely based mostly on enhancements within the development charges of producing and the three vital providers sectors. It was primarily in manufacturing that the primary quarter 2025-26 development at 7.7% was larger than common first quarter development for the earlier three years at 5.8%.
Potential development price and ICOR
We could be aware that within the three vital service sectors — specifically commerce, transport and others, monetary, actual property and others, and public administration and others, development charges within the first quarter of 2025-26 had been fairly excessive at 8.6%, 9.5% and 9.8%. But these had been nonetheless decrease than their corresponding averages within the earlier three years at 12.9%, 11.3% and 13.1%, respectively. An improve in potential development price would require a sustained improve in development in all these sectors. It can be vital to notice that the true gross mounted capital formation price (GFCFR) within the first quarter was practically the identical in 2023-24, 2024-25 and 2025-26 at 34.5%, 34.6% and 34.6%, respectively. Thus, there is no such thing as a structural break.
The estimation of 6.5% as potential development price in our article, “Potential development stays at 6.5%” (The Hindu-BusinessLine, July 4, 2025) is predicated on the behaviour of GFCFR and Incremental Capital-Output Ratio (ICOR). While the GFCFR doesn’t fluctuate an excessive amount of, the ICOR could be very risky. The possible motive is that it’s not estimated independently. It is derived from dividing the true GFCFR by actual GDP development price. Thus, the fluctuations in development get mirrored within the ICOR. It is notable that the true GFCFR has been secure at 33.6%, 33.5%, and 33.7% of GDP throughout 2022-23, 2023-24 and 2024-25, respectively. Using a mean ICOR on the GFCFR, the potential development price could also be derived. With the GFCFR remaining at a mean of 33.6% and an ICOR of 5.2, the potential development price stays at round 6.5%. For potential development to rise above this degree, it is crucial that the GFCFR improves tangibly above this common degree for the earlier three years or the ICOR falls beneath 5.2.
It could also be famous that development charges and the ICOR have been risky in recent times due to the COVID-19 pandemic and subsequent changes. In estimating India’s potential development price, one has to take a look at its efficiency over a for much longer interval. India’s actual GDP development price throughout 2011-12 to 2023-24 averaged 6.1%. In assessing a rustic’s development potential one could have to provide better weight to latest efficiency.
On public sector funding
The ICOR is a mirrored image of how effectively capital is used. Technology and administration in the end decide the ICOR. One might be assured of sustained larger development provided that mounted capital formation price goes up. A latest phenomenon in gross mounted capital formation is the larger position performed by authorities expenditure. In latest years, the share of the general public sector in complete actual GFCF has elevated from 21.6% in 2021-22 to 25.1% in 2023-24. Public sector funding is basically targeted on infrastructure which has a excessive sectoral ICOR.
The surge in public sector funding was largely led by the central authorities. However, that momentum seems to be slowing down. Growth within the Centre’s capital expenditure was at 39.4%, 24.4%, and 28.9% in 2021-22, 2022-23 and 2023-24, respectively. However, this development fell to 10.8% in 2024-25.
In order to extend the potential development price above 6.5%, we might want to improve the GFCFR by about 2% factors from the latest common GFCFR which is round 34%. This will name for a rise within the share of actual funding of the non-public company sector in complete GFCF which has fallen from 37% to 34.4%, throughout 2021-22 to 2023-24. This could also be supplemented by a discount within the ICOR.
Prospects of development
Some of the influences which will have an effect on the long-term potential development on the constructive aspect would come with the affect of fixing expertise similar to Artificial Intelligence (AI) and Gen AI. On the destructive aspect, there can be the affect of a rising share of capital consumption as capital inventory turns into older and new applied sciences name for a alternative of previous capital at a quicker price. These forces could steadiness themselves out, leaving India’s long run potential development shut to six.5%.
The world commerce setting additionally stays difficult for India. Given the tariff and provide chain uncertainties, a lot will depend on the tempo at which India is ready to diversify its commerce locations and funding sources globally. After remaining constructive for the earlier 4 consecutive quarters, the contribution of web exports turned destructive at (-)1.4% factors within the first quarter of 2025-26. This development is prone to proceed. We could recognise {that a} potential development price of 6.5% is, within the current world setting, a fairly excessive degree, though for creating the next development of employment, we do have to push our potential development additional. For this, we have to get the non-public funding price to maneuver up. Policymakers want to deal with this situation on the combination and sectoral ranges. They should perceive what’s holding again non-public funding and recommend acceptable treatments.
C. Rangarajan is Chairman, Madras School of Economics and Former Governor, Reserve Bank of India. D.Ok. Srivastava is Honorary Professor, Madras School of Economics and Member, Advisory Council to the Sixteenth Finance Commission. The views expressed are private
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