India's GDP: A key test lies ahead

Mint

2 days ago

The fiscal policy-led rescue of India's economy from the covid shock has been impressive, even though its pace of expansion slowed to 6.5% in 2024-25, as provisional data shows, after a three-year run averaging above 8.8%.
Last year's rate of GDP growth dropped below the path demanded by Viksit Bharat, but the second half's acceleration reveals a grip on its gear-stick held by the government through public expenditure. How long, though, will state support last?
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Last year's fiscal gap was under 4.8% and this year's 4.4% goal is achievable. After that, public debt will be adopted as the official gauge to constrain risky over-spending.
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Clearly, India's Fiscal Responsibility and Budget Management (FRBM) law needs rework in the light of lessons from our economic recovery. How 2025-26 turns out may be instructive. If inflation stays subdued at around 4%, the central bank's aim, even with the fiscal deficit exceeding the FRBM's 3% cap, it'll be a relief.
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What happens to price stability if private investment and consumption regain full strength, however, remains untested. It's a key test, as faster growth and lower debt require both these to form a robust mutually reinforcing loop.