What India Needs: Budget for double-digit GDP growth for a decade
Many positivities, like cooling down of the inflation rate, agriculture growth and high capital and investment expenditure, are on the borderline and can reverse in the upcoming year due to unfavourable circumstances. The budget must look to create a firewall around these, says Shishu Ranjan
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FollowThe budget session of Parliament this year will be used to present the last full budget of the 'Modi Sarkar 2.0' prior to the General Election set to be held in April-May 2024. On top of that, there are nine state elections scheduled in 2023 and are considered semi-final before the grand finale next year. Therefore, this is the last opportunity for the current finance minister to present a balanced budget that fulfils the aspirations of common citizens to have sufficient income in their hands to lead a dignified life and unleash the economic reform agenda that will unlock India’s high growth potential by attracting higher investment resulting in higher production and exports.
December 2022 certainly brought some good news for the budget planner. The retail inflation rate reduced to 5.88 per cent, which is the lowest since the last budget and is now within the target inflation range of 2 per cent-6 per cent set by the Reserve Bank of India.
Wholesale inflation eased to its lowest value of 4.9 per cent in the last 22 months. The easing of the inflation rate is driven by the lowering of food prices due to increased supply and reduction in aggregate demand driven by the increase in interest rate. With a 7 per cent GDP growth rate, India became the fastest growing nation and is expected to maintain this position in 2023.
Consumers' sentiment and consumption demand surpassed the 2019 values and propelled the GST collection to hit a historical high of 1.5 lakh crore in the last festive season. Expansion in the budgetary allocation (2022-23) for capital expenditure by 35.4 per cent helped in improving the basic infrastructure, and that resulted in Gross Fixed Capital Formation (GACF) registering an impressive growth of more than 10 per cent.
Private investment also picked up in 2022, and Production Linked Incentive (PLI) scheme covering 14 sectors attracted Multi-National Companies (MNCs) to set up their manufacturing units. India's foreign exchange reserve recovered from the two-year low value of $525 billion in November 2022 to $562 billion in January 2023.
Despite all these positivities, the Indian economy has several bottlenecks that need to be addressed via policy interventions. The inflation rate is still above the target rate of 4 per cent and can quickly spiral outside the upper limit of 6 per cent, driven by the Chinese Covid-19 restrictions and the Russia-Ukraine war disrupting the global supply chain.
The inflation rate hits the poor hardest, eroding their real income and pushing them into the poverty trap, and the same is reflected in poor demand in rural India. To ensure food availability, the central government has to continue its flagship program of free ration under the National Food Security Act covering 80 crore citizens.
The continuation of welfare schemes is expected to keep the fiscal deficit high, which may crowd out private investment and derail the entire growth path. On the external front, the trade deficit reached $23.76 billion in December 2022, driven by a decrease in exports by 12.2 per cent. With the increase in bank rate by Federal Reserve Bank, foreign investors withdrew money from the Indian market.
The trade deficit, capital flight and inflationary pressure devalued Indian rupees by more than 12 per cent which resulted in increasing import prices which imported inflation in India and widened the trade deficit, which further put adverse pressure on the exchange and inflation rate. The growth of the agriculture sector is vulnerable because of the unpredictable climate resulting in extreme cold and heat waves that damages the Kharif and Rabi crops.
Therefore, many positivities such as cooling down of the inflation rate, the agriculture growth rate of more than 4 per cent, high capital and investment expenditure, etc., are on the borderline that can reverse in the upcoming year because of unfavourable circumstances and the budget must look to create a firewall around these.
To start with, the budget should allocate funds to strengthen rural demand without adding fiscal burden. This balance can be easily achieved if private and public investment is targeted towards the rural economy, such as strengthening the MSME sector operating from tier 3 cities or Panchayati region, incentivising IT sector to open offices in rural India, setting up agro-industries, canvassing the rural tourism places in metro cities as well as abroad to attract potential tourist, and improvising the health sector in rural India to attract medical tourism.
To displace China as the world’s factory, India needs to unleash labour reforms and improve its law and order across all states to handle adverse situations arising out of land disputes. Incentives need to be designed to transition MSME firms into MNCs. To reduce the trade deficit, India needs to accelerate its alternate source of energy project while balancing the climate risk, as more than 20 per cent of its total import is petroleum oil.
To boost the growth of exports, the government must act to industrialise Bihar, Bengal and Odisha which can serve as a gateway to east Asia via ports located on the eastern coast to reduce the cost of transportation and compete with Chinese goods in the international market.
To continue with strong consumer sentiment and robust industrial production amid the global slowdown, the government must devise a way to improve the real income of the bottom 50% of the population holds less than 15 per cent of the total income in India.
In a nutshell, the upcoming budget needs to be balanced as the recovery of the Indian economy is on the shaky ground of the global economic slowdown predicted in 2023 and upcoming elections expecting populist measures to secure votes and save incumbent governments. India is at the inflection point on the growth path, and good economic policies designed to propel India on a double-digit GDP growth rate for the next 10 years at the minimum need to be designed and this budget can serve as the first step in that direction.
The author is Vice President-Independent Validation Unit (Model Risk) at Barclays
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