Opportunities and choices in the Budget

With relatively higher economic growth and lower inflation than most G20 countries in 2022, India has weathered the global shocks comparatively well. Its fiscal and current account deficits remain high, but its substantial reserve holdings and calibrated exchange rate policy have allowed it to manage the large financial outflows.  In financial year 2022-23, India should see growth above 6.5 per cent, and inflation now below 6 per cent would be the envy of many.
 
With the US and Europe headed for a recession, induced by tight monetary policies needed to fight rampant inflation, and with China suffering due to its self-inflicted Covid policies, India appeared as a bright spot amongst large energy importing countries in the world in 2022. In the G20, only Saudi-Arabia has a faster gross domestic product (GDP) growth, fuelled by higher oil prices.

 
Having navigated 2022 better than most others, what of the future? In 2023, many of the past year’s uncertainties and risks continue and then some. The conflict in Iran and a more belligerent China could add to the risks for India. India’s GDP growth is projected at 6.5 per cent, which many feel will be difficult to achieve. But (even) at this rate, it will take India 8-9 years to cross the $4,100-level — the World Bank’s upper-middle income category and where Iran and Indonesia are today. Surely, we must try to do better.
 

With the global economy and trade slowing down, many experts curiously recommend a cautious approach to fiscal consolidation. It isn’t clear why fiscal consolidation will add greater risks to the Indian economy. In fact, as the International Monetary Fund has also pointed out, the opposite is more likely: Lack of fiscal consolidation will keep the current account deficit at elevated levels and make India’s macroeconomic stability more precarious.

 
Fiscal consolidation over the medium term is necessary not just for macro-stability, given India’s high public debt of over 80 per cent of GDP and rising interest bill (over 3 per cent of GDP), but without it a revival in private investment, which everyone knows is key to faster growth in the economy, is unlikely.
 
Looking back, what marks the period 2000-2010, the decade when India tripled its GDP per capita, is the high levels of total private investment at 25-30 per cent of GDP, and corporate investment, which for the first time exceeded 15 per cent of GDP. Since 2010, India’s GDP per capita has not even doubled as private investment slumped. We need a revival of investment to those levels to see a GDP growth of 7-8 per cent.

 
If the private investment to GDP share is to rise close to 25-30 per cent of GDP as in the past, a fiscal deficit of only around 3 per cent of GDP is consistent with a current account deficit of 1-2 per cent of GDP. Anything more is macro-economically infeasible and unsustainable as otherwise the private sector financing gets squeezed out and private capex cannot be increased.
 
Will we see such a revival in the coming years? Capacity utilisation rates, which were close to 80 per cent on average in that high growth decade of 2000-2010, have been much lower, though they have recovered in many key sectors to over 70 per cent on average and are touching 75-80 per cent in a few. The banking sector appears to have been cleaned up sufficiently to see a revival in private credit. Recent recovery is mostly in retail credit, but corporate credit could see a revival too.

 
Competitiveness remains an issue as the costs of doing business remain high, and this should be where the government must focus and not just rely on production-linked incentive subsidies to attract investment. Energy prices and logistics costs remain too high and labour law reforms, except in a few states, remain largely on paper. With global firms looking to move out of China, it’s not inevitable they will come to India; they will go to the most competitive locations. The decision by Apple to diversify into India is positive, but we need many more.
 
Non-corporate investment is primarily driven by public sector infrastructure spending and it is here that the government’s focus on maintaining and even increasing public capex, even during a difficult period, must be welcomed. In addition to higher allocations to public capex, fixing the regulatory environment and procedural delays in investment projects will help attract genuine private capital that can accelerate climate-friendly investment, which India needs to move forward on its climate goals.

 
As we go to elections in 2024, the FY23-24 Budget may be the only option for fiscal consolidation, but that will not be easy. Fertiliser subsidies have increased hugely. The recent shift to free grain under the public distribution system (PDS) is a signal that elections are on the government’s mind. Ending the Pradhan Mantri Garib Kalyan Anna Yojana saves money in the short term, but free PDS will add to fiscal problems over the medium term as pressure grows to increase minimum support prices nearer the elections.
 
If fiscal consolidation from 6-7 per cent of GDP to 4.5 per cent of GDP over the medium term is to be brought about without reducing public capex, fertiliser and other subsidies must be rationalised and collapsed into PM Kisan payments, and a shift towards cash transfers instead of free PDS must be on the agenda. Tax and other revenues must also rise by 2-3 per cent of GDP — especially as our defence needs rise to face a belligerent China. This will require further reform in the goods and services tax and an accelerated privatisation programme.

 
Over the medium term, China could also create trouble for India to take a shine off its G20 year. The best way to counter China permanently is to catch-up with it economically. Fiscal consolidation is needed if India is to seek sustainable private sector-led growth of 7-8 per cent in the medium term. The stakes for 2023 and beyond in the Budget are indeed high.
 

The writer is senior visiting professor, ICRIER