Lot of clamor about India’s abysmal 5.4% GDP growth rate in Q2 FY25. People were expecting a much higher growth.
But, is the 5.4% GDP growth real or nominal?
What is the difference between real and nominal GDP growth rate at the first place?
Moreover, is this reported GDP growth rate in ₹ terms or $ terms? What does currency have to do with these reported growth rates anyways?
Let’s understand —
Real GDP is the total value of all goods and services produced in a given time period, calculated without accounting for inflation.
Nominal GDP is calculated using current market prices.
The reported 5.4% growth rate (in Q2 of FY25 against Q2 of FY24) is the “real” GDP growth rate in ₹ terms.
“Nominal” GDP growth (in ₹ terms) is higher than 5.4% since it takes inflation into account.
Nominal GDP growth in ₹ terms = Real GDP growth + Inflation (in ₹)
Btw, what does currency have to do with these reported growth rates?
The 𝗩𝗶𝗸𝘀𝗶𝘁 𝗕𝗵𝗮𝗿𝗮𝘁@𝟮𝟬𝟰𝟳 vision of a $30T economy by 2047 (from $3.4T in 2024) translates to a “nominal” GDP growth rate target in “$” terms to ~10% over the next 23 years — these GDP estimates are in $ terms.
Nominal GDP growth in $ terms
= Real GDP growth + Inflation (in ₹) – ₹ depreciation with respect to $
= Nominal GDP growth in ₹ terms – ₹ depreciation with respect to $
Assuming an annual ₹ depreciation of 2% against the $…
Nominal GDP growth target of 10% (in $ terms)
= Nominal GDP growth in ₹ terms – ₹ depreciation of 2%
=> Nominal GDP growth in ₹ terms = 12%
i.e., Indian economy needs to grow at 12% in ₹ terms and 10% in $ terms over the next 23 years — to achieve the 𝗩𝗶𝗸𝘀𝗶𝘁 𝗕𝗵𝗮𝗿𝗮𝘁@𝟮𝟬𝟰𝟳 vision.
Hope we get there! and hope this helped!
Image credits: Economic Times
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katana