Fall in nominal GDP in FY24 may hit India’s fiscal math

Normally, when we talk about GDP it is always real GDP net of inflation. However, nominal GDP also has its own importance since it shows the volume and level of economic activity in India. Real GDP tends to come under pressure when inflation rises but nominal GDP gives a much better picture of overall growth in the economy. Now the concern is that the nominal GDP growth in FY24 could slow down to the lowest level in the last 53 years and that could have larger ramifications for the level of economic activity and also for the level of job creation in the economy. According to estimates, while real GDP growth could fall to 5.2% in FY24, the nominal GDP growth could fall to below 7.5% in FY24.

The projection is that the GDP decline could happen due to factors like slowing down of the global economy, contraction in demand and normalising base effects. With retail inflation falling sharply to around 4.3% in FY24, the GDP deflation could go as low as 2%. That is not great news for nominal GDP. If that happens, then FY24 will bet the slowest growth story in the last 50 years with massive downstream repercussions. Let us look at what could be the implications for the macroeconomy and financial markets if there is a fall in the nominal rates of growth and why does it matter when we mostly use real GDP for all our measurements of GDP in the Indian context. Here is the answer.

Remember that revenue of large corporates tends to be very closely linked to the nominal GDP in the economy since that is what defines the level of activity in the economy at a macro levels. Now Nominal GDP growth in FY24 is expected to be just 7.3% YoY in FY24 as compared to an impressive 15% in FY23 and 20% in FY22. Of course, we can discount year FY22,since that was on a relatively smaller base. However, lower nominal GDP growth would also mean that the Indian government debt could increase to 84.7% of GDP in FY24 and onwards to 85% in FY25.

One impact would be on bank credit. The relationship has been that bank credit growth has been around 1.2x-1.3x of nominal GDP growth. If credit growth is expected to be 16% in Fy23, it could come down drastically to below 10% in FY24. That is not great news for an economy that is largely growth driven. Government, perhaps, needs to be wary of loss of macro top line as the slower nominal GDP growth could have serious implications for the macroeconomy. The full impact could play out over the next year and half.