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30 January 2023 – The Indian Express

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Budget 2023 Should Lay the Path for 2047

Present circumstances:

  • The most recent initial advance estimates from the National Statistical Office indicate that the GDP in constant prices for FY23 was 8.6% higher than it was for FY20, the year before to the establishment of COVID.
  • In other words, India saw annual growth of 2.86 percent over the past three years. Keep in mind that Covid came after an FY20 period with a low base growth of 3.7%.
  • It follows that the incoming budget needs to have a major emphasis on achieving higher growth over the long term.
  • Global headwinds such as geopolitical factors, the slowing economies in the US, Europe, and China, the consequences of the US-Russian conflict, high inflation, etc., should also be considered in the budget. Even still, it is reassuring for the global economy that China might lift its Covid-19 limitations.

What beneficial features stand out in particular from the last two budgets?

  • First, they were transparent about the fiscal deficit estimates by providing the previous off-budget data.
  • They increased infrastructure capital spending as well.
  • The path to fiscal consolidation begins with the third phase. We can only hope that these three good programmes will remain in the forthcoming budget.
  • The two main elements affecting GDP growth are exports and investment.
  • It is commonly known that the investment rate (gross capital creation as a percentage of GDP) has declined from 39% in 2011–12 to 31% in 2019–20.
  • If India intends to become a developed country by 2047, the investment rate must increase to 36% or higher. Capital expenditures (capex) have increased by the government in recent years, rising from Rs. 4.12 trillion in FY21 to Rs. 5.54 trillion in FY22 to Rs. 7.5 trillion in FY23. Both in FY22 and FY23, capex rose by over 35%.
  • Government spending on capital projects should continue to rise.
  • The fiscal effect multiplier for capital expenditures is 1.32, compared to 0.72 for total expenditures, according to the RBI (capital plus revenue). It demonstrates that the only type of spending that increases GDP proportionally is capital spending.

Should the government enhance capex by 35% and propose Rs 10 trillion in spending for FY24 in the upcoming budget?

  • The increase need not occur at the same pace as the two prior budgets. India’s high growth rates in the 2000s were mostly attributable to significant levels of private investment, particularly corporate investment, aside from the residential sector.
  • Private sector capital expenditures are showing signs of recovery after being affected by the pandemic for two years. The twin balance-sheet issue has abated now that businesses are deleveraging and the banking sector has cleaned up its balance sheet. Credit is increasing by about 17%.
  • Retail sales are increasing, and corporate credit growth is too. There may be some funds available for the PLI (production linked incentives) programme. However, in order to promote private investment, measures to achieve price, fiscal, and financial stability, to give policy predictability, to boost ease of doing business, including lowering the cost of doing business, may be necessary.

Regarding medium-term budgetary consolidation and export-driven growth:

  • Medium-term fiscal consolidation is essential for the budget due to the substantial combined fiscal deficit of about 9% and the high level of public debt of over 90%. Interest income contributes 43% of the government’s overall revenue and makes up 24% of the budget.
  • The government may stick to its FY23 fiscal deficit target of 6.4% thanks to stronger receipts and a nominal GDP growth rate of 15.4%. In the medium term, bringing down the fiscal deficit to between 3 and 4 percent is necessary to boost private investment.
  • The second factor driving growth is exports, one of the main sources of both job creation and growth.
  • For improved growth in exports, the country needs an open, reliable, and consistent trade policy framework. Regrettably, protectionist government policies toward international trade are on the rise. International trade is mostly driven by global value chains. Import tariffs impede this process since they increase the cost of importing and disrupt the production process. The “Look East” tactic is also very important.

Regarding growth based on both long- and short-term (fiscal and monetary policy) factors:

  • When developing the plan for the next 25 years, the administration must focus on both short- and long-term aspects.
  • In order to avoid growth from being interrupted, monetary and fiscal policy may need to accelerate growth in the short term and address global concerns.
  • Similar to China, India must address its significant structural problems if it hopes to achieve development status by 2047. The recovery from the epidemic hasn’t solved the medium- to long-term growth problems.
  • The difficulties include managing climate change, creating enough high-quality jobs, preserving financial stability, and assuring low and stable inflation.

Other economic factors that are essential for economic expansion and development are as follows:

  • India benefits greatly from the demographic dividend. Along with boosting productivity and promoting private investment, education and skill development need to be specifically taken into account. An further long-term challenge is the structural restructuring. Agriculture in India needs to be changed, and farm incomes must rise. The solution to structural change, labour absorption, and exports is thought to be labor-intensive manufacturing.
  • Manufacturing sector: There is potential for expansion in both the MSME sector and manufacturing. Manufacturing and services ought to be combined.
  • The standard of the health, education, and skill sectors is another structural issue.
  • Reducing carbon emissions and hastening the energy transition present a problem and an opportunity.
  • The digital revolution can significantly contribute to future better growth.
  • The potential impact of technology and mechanisation on employment must be considered. However, there is also cause for concern given the low percentages of female labour force participation.

Conclusion:

  • India currently has the fifth-largest economy worldwide. It is anticipated that it would overtake Germany and Japan in ten years and take third place. India, on the other hand, ranks 142 out of 197 countries in terms of per capita income.
  • India must expand swiftly given its existing per capita income, according to former RBI governor C. Rangarajan. States contribute similarly, if not more, to increasing job prospects and economic growth.

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