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Robust economic expansion creates a sense of complacency among the public, which is less inclined to scrutinise a fortuitous situation. When the growth surpasses global standards by more than doubling the levels seen by any comparable entity, criticism becomes even scarcer. This holds true not only for emerging startups but also for national economies. Both fall prey to the “analyst fog,” a phenomenon where the uncertainties of the future accentuate the importance of a remarkably positive current state.
India is currently basking in a promising economic outlook. The National Statistical Office anticipates a real growth rate of 7.3 percent for the ongoing fiscal year, concluding on March 31, 2024, propelled by a robust 7.7 percent growth in the first half of the fiscal year. The International Monetary Fund, revising its October 2023 estimate, has increased the projection to 6.7 percent in its January 2024 assessment. Looking ahead, the Reserve Bank of India foresees seven percent growth in the upcoming fiscal year, diverging slightly from the IMF’s forecast of 6.5 percent.
While the rest of the world is not experiencing the same level of radiance, the International Monetary Fund (IMF) paints a nuanced picture of growth in emerging economies. The assessment for 2023 stands at 4.4 percent, with projections of 4.3 percent for 2024 and a further dip to 4.1 percent in 2025. Notably, India emerges as the swiftest-growing large economy in the upcoming fiscal year (2024–25), outpacing China. China, on the other hand, is expected to see a decline from 5.2 percent in 2023 to 4.6 percent in 2024. Looking into the future, there is a strong consensus on India’s economic prospects, even in fiscal 2025–26. The IMF envisions a growth rate of 6.5 percent for India, albeit slightly more conservative than in FY2024–25, yet significantly surpassing the projected growth for emerging economies (4.2 percent) and China (4.1 percent) in 2025.
Is this the manifestation of the envisioned “Amrit Kaal” (Prime Minister Narendra Modi’s metaphor for a golden period)? Admittedly, India has a historical track record of maintaining growth between 6.5 and 6.7 percent over prolonged spans, creating a foundation for a plausible uptick of 0.5 to one percentage point in the growth rate. The potential for productivity gains stemming from technological advancements, deeper integration of the digital economy, and increased utilisation of artificial intelligence, coupled with the downward trajectory of global commodity prices and the strengthening of global trade trends, all present opportunities for growth. However, it’s crucial to recognise that these are speculative outcomes contingent on uncertain external events. The paramount concern lies in devising strategies to ensure that the momentum of growth remains unhindered.
Formulating an astute national strategy to stay at the forefront can revolve around three fundamental pillars. Firstly, perpetuate successful practices that involve seizing global opportunities, such as procuring oil from Russia despite sanctions or attracting hi-tech investments by offering a friendlier environment and access to a potentially substantial domestic market. Entities considering relocation favour not only high growth but also preferential treatment. Hence, maintaining flexibility in deal negotiations is crucial, alongside ensuring a stable political environment, which is generally perceived as a given.
The second pillar emphasises the centrality of public welfare for governments operating within the lower-middle-income bracket. However, a clear boundary needs to be established when welfare initiatives, while essential, start impinging on growth due to inadequate investment in productivity enhancements. Presently, national subsidies drawn from the budget constitute 1.2 percent of the GDP, amounting to Rs 4 trillion. Technological advancements have positively impacted equity in tax collection, but there is still ongoing work required to deepen the tax take in proportion to GDP. The tax-to-GDP ratio has fluctuated within a range from a low of 9.98 percent in 2009 to a high of 11.17 percent in 2024. The limitation of revenues acts as a hindrance to public investment.
The net tax collection of Rs 26 trillion ($313 billion) by the Union government doesn’t align with the aspirations of a “big government,” which involves direct intervention in manufacturing, infrastructure development, and the provision of private capital goods such as affordable housing and new public facilities including hospitals, schools, and colleges. To support these initiatives, there is a need to augment revenue receipts by two to three percent of the GDP. This can be achieved either through increased tax collection or by generating substantial “other non-tax revenue” by monetizing existing public assets and undertaking the privatization of public sector companies and banks. The interim budget sets a target of just Rs 4.1 trillion (1.2 percent of GDP) under this category, equivalent to the expenditure on subsidies.
Establishing a direct connection between receipts and specific expenditure demands has the potential to enhance assertiveness and strategic focus.
Associating “other capital receipts” in a conceptual manner with budgetary allocations for welfare subsidy payments and developmental subsidies, such as support for MSMEs, viability gap funding for green energy technology, electrification of transport, and advanced manufacturing, can establish a baseline for this often overlooked revenue stream. As capital outlays surge by 50 percent from 2022–23, amounting to Rs 4.5 trillion, or 1.4 percent of the GDP, it becomes imperative to move beyond relying on unsustainable “borrowing” to cover both capital requirements and address the revenue gap.
The current public debt, encompassing both union and state levels, stands at nearly 90 percent of the GDP, surpassing the standard limit of 60 percent. In order to instill fiscal discipline in capital utilisation, it is advisable for the Comptroller and Auditor-General to scrutinise the effectiveness of our investment plans and allocations. The rising Incremental Capital Output Ratio (ICOR) serves as a potential warning sign, suggesting that either capital allocations lack efficiency or project execution is lagging behind.
The Union government plays a pivotal role in preserving fiscal stability, a commitment that was evident early in the first term of the Narendra Modi government. The focus was on reducing the fiscal deficit (FD) from 4.5 percent to 3.5 percent by 2017–18. This was a departure from the previous government’s decision to abandon similar attempts by 2013–14, following the aftermath of the Western financial crisis. The strategy involved maintaining high pump (retail) prices despite a global decline in oil prices, leading to an increase in public resources and a subsequent decline in the fiscal deficit. While this approach had adverse effects on the middle class, a crucial constituency for the new government, it laid the groundwork for a stable fiscal foundation and enhanced fiscal credibility. This commitment proved essential when the fiscal deficit was significantly raised to 9.2 percent in 2020–21 to address the economic shock triggered by the COVID-19 pandemic. However, the current trajectory aims to achieve a normative fiscal deficit of four percent of GDP only by 2026–27, dangerously close to the next general election in 2029, raising concerns about the lack of a robust fiscal commitment.
In a broader context, the Union government finds itself constrained by an inclination towards overreach. The idea that a combination of wisdom and financial resources can be imposed downward is questionable. Internationally, we dismiss such an approach, and it may not be the most suitable option for a country as vast as Bharat. It would be prudent for the Union government to channel budgetary outlays more precisely into its core mandates, including security, diplomacy, national standards, space, science and technology, external trade, regulation of financial markets and banks, cross-border networks, pan-national health, education, and environmental concerns. However, the current scenario deviates from this principle, with capital being allocated for an overwhelming 170 “major schemes,” a substantial increase from just 73 in 2017-18. Sometimes, achieving effectiveness and efficiency involves doing less rather than attempting to do everything.