10 February 2024 – The Hindu

Economic Resilience and Fiscal Policies

• Fiscal policy in particular has been crucial in determining the post-pandemic growth rebound. After the epidemic, the fiscal policy shifted from prioritising welfare to a growth plan backed by public investments aimed at expediting the infrastructural build-up. This was accomplished while continuing on the glide path of a declining GDP to fiscal deficit ratio.
• The Indian economy is expected to increase by 7.3% this fiscal year, according to the National Statistical Office’s (NSO) initial advance GDP projections. This is a greater growth rate than the 6.5% forecast by the Economic Survey in January 2023. In light of this, the recently proposed Interim Budget must take into account a number of unresolved concerns in order to sustain the anticipated growth pace.

Temporary Financial Plan:

• The Interim Budget is a financial statement that includes a thorough accounting of all the government’s out-of-pocket costs and revenue for the next several months, up until the election of a new government. It also incorporates earnings and outlays from the prior fiscal year.

The following are the areas where it differs from the standard budget:

• While a conventional budget contains estimates of expenditure for the entire year, an interim budget documents expenses up until the next election.
• Major policy changes are typically not disclosed in the interim budget either.
• Only an interim budget is presented by the departing government, or they request a vote on account.
• A ‘Vote on Account’ is not the same as an interim budget. An interim budget is a comprehensive set of accounts that includes both expenditure and receipts, whereas a “Vote on Account” simply addresses the expenditure side of the government budget.

What is the growth trajectory of India looking like right now?  

• The government’s investment strategy has seen investments soar this year, hitting 34.9%, outpacing GDP growth. To reach the desired fiscal deficit of 4.5% of GDP by 2025–2026, the government is urged to decrease budgetary support for capital spending.
• Election-Year Fiscal Consolidation: It is imperative that the government accomplish fiscal consolidation during an election year. According to the Ministry of Finance’s assessment paper, growth of about 7% is anticipated in the upcoming fiscal year, and by the end of the decade, India’s economy might reach $7 trillion.
• Healthy Medium-Term Forecasts: Multilateral agencies’ forecasts also show promising medium-term growth prospects. The following fiscal year’s GDP growth is predicted to decelerate to 6.4% before picking up speed. This is because of tighter financial conditions both domestically and internationally, as well as slower global growth.
• Concerns about inflation: Unlike developed nations, India’s core inflation rate has swiftly recovered to 3.8%, while fuel inflation is at -1%.
• India’s high food inflation is the only reason headline inflation has not yet been brought under control. It can be concerning when there is significant food inflation combined with the underperformance of the rural and agricultural economies.
• Climate Change and Economic Effects: The year 2023 saw the highest annual temperature ever recorded, serving as a reminder of the growing threat posed by climate change. India is one of the nations most susceptible to climate change.
• In its evaluation, the Ministry of Finance highlights the need for studies, innovations, and policies that address climate change without impeding economic expansion.
• Monsoon: Despite a 36% deficit in rain in August 2023, the total amount of rainfall for the monsoon season was 6% less than anticipated. Nevertheless, the distribution of the rainfall was quite uniform. 29 states and UTs saw normal to above-average rainfall out of 36.
• With a value of 89.5 in 2023, the SBI Monsoon Impact Index—which takes into account the spatial distribution—performs significantly better than the whole season index value of 60.2 in 2022 (greater monsoon productivity is correlated with higher agricultural productivity).
• Sustained Focus on Capital Expenditure: In the first half of 2023, state capital spending as a percentage of the planned target was 25%, while the federal government’s was at 37%, greater than in prior years and indicative of increased capital creation.
• New Company Registrations: The comprehensive registration of new firms indicates a strong desire for expansion. In the first half of 2023–24, there were about 93,000 registered companies, up from 59,000 five years earlier.
• It’s interesting to notice that, from 395 in 2018–19 to 622 in 2023–24 (a 58% rise), more new companies were registered on average every day.
• India’s Exchange Rate Regime Reclassified: The IMF has reclassified India’s exchange rate regime, designating it as a “stabilised arrangement” rather than “floating,” signifying a change in the understanding of the country’s currency management practices.
• The foreign exchange market’s supply and demand dynamics decide the exchange rate under a floating exchange rate system, while the government sets it in a stable arrangement.
• Reduced Current Account Deficit (CAD): In the second quarter of 2023, India’s CAD decreased to 1% of GDP from 1.1% in the previous quarter and 3.8% in 2022.
• According to Reserve Bank of India (RBI) figures, the CAD shrank to USD 8.3 billion in the September quarter of 2023–24 from a deficit of USD 9.2 billion in the previous three months.
• There was a USD 30.9 billion shortfall in the current account balance during the second quarter of 2022–2023.

Which will be the main obstacles facing the Indian economy in 2024?  

• Global Economic Integration: Developments throughout the world have an impact on India’s progress in addition to variables that are exclusive to the country. Thus, growing global events may provide a challenge to India’s development.
• Further friend-shoring and onshoring is expected as a result of increased geoeconomic fragmentation and the slowdown of hyper-globalization. These developments are already having an impact on global commerce and, by extension, on global GDP.
• Energy Security vs. Transition: There is a difficult trade-off to be made between continuing the energy transition and promoting economic growth. Given its geopolitical, technological, financial, economic, and social elements, this subject needs to be carefully considered.
• Individual nations’ policy decisions made in the name of achieving their energy objectives may have repercussions for other economies.
• Artificial Intelligence (AI) Challenges: As noted in an IMF research and the Chief Economic Advisor (CEA) of India report, the emergence of AI also presents a significant challenge, particularly in the services industry.
• This was noted in the IMF report, which estimated that 40% of jobs worldwide are at danger from AI, with complementarity advantages coexisting with displacement threats.
• Growing Inflation: The effect of growing inflation on the whole economy is a significant problem for the government.
• Growth is impacted by inflation because it modifies the labour supply and demand, which lowers overall employment in the industry with growing returns. The marginal productivity of capital will decrease when the level of employment declines.
• Requirement of Skilled Workforce: It will continue to be difficult to ensure that age-appropriate learning results in schools at all levels, a healthy and fit population, and a talented and adequately skilled workforce are all essential policy priorities in the years to come. A population that is educated, skilled, and in good health enhances the economically productive workforce.
• According to the results of the Wheebox National Employability Test, the employable proportion of final-year and pre-final-year students grew from 33.9% in 2014 to 51.3% in 2024, but much work still has to be done.
• Geopolitical Tensions: The country will face challenges in maintaining strong export levels in the current climate due to lingering geopolitical tensions, which include the recent events in the Red Sea that have exacerbated the slower growth in global commerce in 2023.
• Due to the attacks on Red Sea exports by the rebel organisation Houthis, which is supported by Iran, many countries—including India—have been obliged to reroute their cargo from the problematic routes to more expensive and lengthy ones.
• According to some estimates, the Red Sea situation may cause India’s exports to drop by USD 30 billion in the current fiscal year.

What Reforms Will Be Needed in 2024 to Support Sturdy Economic Growth?

• In the process of moving towards a sustainable debt trajectory, the government of India must maintain its focus on fiscal consolidation. As of 2022–2023, the country’s general government debt to GDP ratio stood at 82% of GDP, with interest payments accounting for approximately 17% of total expenditure. This means that there is little room for the government to spend money on more productive projects.
• Strong direct tax revenue, increased RBI dividend payments, and public sector projects should make up for this year’s reduced divestiture.
• The government is projected to achieve a budgeted fiscal deficit target of 5.3% for 2024–25 with a good tax buoyancy, as it proceeds along the glide path to a fiscal deficit of 4.5% for 2025–26.
• Maintaining Attention to Capital Expenditure (Capex): Capex has a significant multiplier effect on growth, therefore it is imperative that we continue to focus on it in the upcoming years. It is anticipated that capex would increase by 10% to approximately Rs 11 trillion, with a persistent emphasis on infrastructure.
• Following the pandemic, the government has been using capital expenditures (capex) more frequently to drive growth; in 2023–2024, the government has budgeted to expand this ratio to 3.4% of GDP.
• Additionally, the government has allocated funds for interest-free loans of Rs 2.3 trillion to state governments for capital expenditures during the past two years.
• Need to Encourage Consumption: The recovery in consumption has been comparatively feeble and seems to be biassed towards the higher income group. According to advance forecasts, GDP will expand by 7.3% in FY24, but consumption growth would only be predicted at 4.4%.
• With the current state of inadequate foreign demand, a resurgence of internal demand becomes even more vital. Despite the fiscal constraints, initiatives to stimulate consumption demand must be developed.
• For example, a modest reduction in the excise duty on petrol and gasoline by Rs. 2-3/litre may assist manage inflation and boost consumption without having a major impact on the fiscal figures.
• Enhanced Human Capital Expenditure: In many European nations, public expenditure on social services accounts for over 50% of GDP. Considering that a substantial portion of India’s populace depends on government assistance, it is imperative to augment the amount allocated to these services.
• India is in a unique position to benefit from a big working-age population at a time when most countries are grappling with an ageing population; nevertheless, government investment in human capital is necessary before the economy can reap the benefits of the demographic dividend.
• This calls for much more spending on health, education, and skill development in order to prepare the working-age population for meaningful employment.
• Focus on Agriculture and the Rural Sector: 65% of India’s population lives in rural areas, where the agriculture sector plays a major role in the country’s economy. The country’s agricultural productivity, measured in terms of Gross Value Added (GVA), is only 1% of that of the US and a third of that of China. Improving the sector’s productivity will help raise rural incomes.
• Appropriate skilling of the rural workforce and enabling them to move to the manufacturing and services sectors will also help to reduce the large reliance of the rural workforce on the farm sector. This could be achieved through the adoption of the latest technology and by boosting rural infrastructure.
• Emphasis on Current challenges: Other matters that require sufficient attention include the improvement of the marginalised segments of society, the necessity of fostering an atmosphere that allows enterprises to prosper, and environmental challenges.
• Now is the moment to pay attention to growth’s quality in order to make sure it’s fair, sustainable, and environmentally friendly.
• Despite global uncertainties, the first advance GDP estimates predict a robust growth of 7.3% for the Indian economy; the government’s fiscal policies, which have shifted from welfare focused on pandemics to public investment, have improved economic capacity, as evidenced by increased investment.
• For fiscal consolidation, budgetary assistance for capital spending must be moderated. Sustaining growth requires managing food inflation, adjusting to climate change, and upholding macroeconomic fundamentals, all of which provide difficult but necessary challenges for policymakers.