Optimistic outlook

Higher growth will need more reforms

The biggest takeaway from the Economic Survey 2022-23, presented by Union Finance Minister Nirmala Sitharaman in Parliament on Tuesday, is that recovery from the pandemic-induced disruption is complete and the Indian economy is poised for higher growth in the medium term. The theme was also elaborated by Chief Economic Advisor (CEA) V Anantha Nageswaran in a presentation later. Although the Survey presents the views of economists in the finance ministry, led by the CEA — and their reading and recommendations are not always reflected in the Union Budget — it does give a broad sense of how the government is looking at evolving economic conditions. In terms of expectations, while this year’s Survey has described the economic backdrop in detail, its projections for growth look optimistic.

For the coming fiscal year, the Survey has projected a baseline real gross domestic product (GDP) growth rate of 6.5 per cent. Depending on economic and geopolitical conditions, growth could be in the range of 6-6.8 per cent. Given the overall economic and geopolitical settings, actual growth is likely to be closer to the lower end of the range than the upper end. The global economy is likely to slow in 2023, with a number of developed economies expected to slip into recession. The tightening of monetary and financial conditions in advanced economies is likely to continue, and interest rates are expected to remain elevated for some time. Further, the geopolitical environment remains uncertain and the ongoing Ukraine war could affect the global economy in multiple ways. All these factors will have implications for both the current and capital accounts on the external front. The Survey has rightly highlighted the current account risk. It also talks about early signs of revival in private investment. While this is encouraging and will support growth, the broader macroeconomic uncertainty may not encourage firms to start building capacity in a big way. It would be interesting to see the nominal economic growth assumption in the Budget. Conservative assumptions have helped the government in recent years.

The Survey also notes that India’s potential growth can increase to 7-8 per cent. It argues reforms since 2014 have not resulted in higher growth so far because of one shock after another. Balance-sheet stress in both the corporate and the banking sectors after the financial crisis affected growth outcomes. As the balance sheets got repaired over time, the collapse of Infrastructure Finance and Leasing Services Ltd in 2018, followed by trouble in some other non-banking financial companies, affected the financial sector. The economy was then hit by the pandemic in 2020, which led to a sharp contraction. As the economy is now seen to have recovered from this unprecedented shock, reforms implemented over the years are expected to push up the growth rate. It is reasonable to argue that reforms will help the economy over time, but some of them, such as the goods and services tax and the Insolvency and Bankruptcy Code, need more work to perform as desired. The evolving geopolitical conditions and the state of domestic public finances would also have a bearing on growth. Achieving sustained 7-8 per cent growth would thus require more policy interventions. One area of focus in this context could be trade.