Budget needs to prioritise strategies for sustainable economic growth

The first advance estimates (FAE) of national income for this financial year (2024-25), released by the National Statistics Office (NSO) on Tuesday, showed the Indian economy would expand 6.4 per cent as against 8.2 per cent in 2023-24. The NSO’s estimate is also marginally lower than the 6.6 per cent growth rate projected by the Reserve Bank of India, and will be the lowest after the Covid year contraction (2020-21). In nominal terms, the economy is expected to expand 9.7 per cent, compared to 9.6 per cent last financial year. The FAE was keenly awaited after the second-quarter growth rate of 5.4 per cent, which surprised most analysts on the downside.  Besides, it will be used by the Ministry of Finance for preparing the Budget for 2025-26, expected to be presented on February 1.

 

The government is unlikely to be pleased with the FAE, which could increase challenges both for the current year and the medium term. Lower than expected growth in nominal terms means the government would have to cut expenditure to contain the fiscal deficit at 4.9 per cent of gross domestic product (GDP) in the current year. The Union Budget had assumed nominal GDP growth at 10.5 per cent for the year. Although the difference in absolute terms would be marginal, it will still require an adjustment. This could become difficult if revenue estimates also have to be revised lower. According to the available data, revenue collection during April-November was 59.8 per cent of the Budget Estimates (BE), compared to 65.3 per cent in the same period last year. Although expenditure is also lower than it was last year, in comparison to the BE, the difference is small. It is likely that the government will not be able to spend the allocated budgetary amount for capital expenditure. While it will help contain the fiscal deficit, it will also hurt the growth outcome.

 

Nonetheless, since there are roughly three months left in the financial year, the government has the time to make necessary adjustments. It would be interesting to see how the adjustments are reflected in the Revised Estimates. If growth doesn’t recover in the second half of the year, as expected by the FAE, it could further complicate the picture. For the next year and from a medium-term perspective, the challenge for the upcoming Budget will be to set the economy on a sustainable, higher growth trajectory. Several economists have argued that the current economic slowdown, compared to the past few years, is not an anomaly but a return to normalcy following the post-pandemic surge. This argument increases the magnitude of the challenge. Further, it’s worth remembering that growth is being supported, to a large extent, by higher government capital expenditure, which is budgeted at 3.4 per cent of GDP in the current year. There are limits to the extent this can be increased because of fiscal constraints.

 

Therefore, to grow at a higher rate, other cylinders of the economy will need to fire. Union Finance Minister Nirmala Sitharaman had announced in the July 2024 Budget the government would formulate an economic-policy framework to push next-generation reforms. The government would be well advised to present the framework as early as possible, preferably in the upcoming Budget, so that it can be operationalised at the earliest. Given the global economic environment is unlikely to be supportive in the foreseeable future, the impetus will need to come from domestic policies aimed at improving the business climate and increasing the competitiveness of Indian businesses.