Sitharaman’s challenge: Jobs, private investments, fiscal consolidation

A Rajya Sabha MP from Karnataka, Sitharaman has been credited with presenting a fiscally-prudent Budget just before elections. She has ably steered the Indian economy to register 7 per cent-plus growth rate for three years in a row, which is significant coming in the backdrop of poor global conditions and a slowing down of the world economy

In the run-up to polls, Sitharaman said she was offered a ticket but refused to contest the Lok Sabha elections.

As she takes charge of the Finance Ministry amid the backdrop of global and economic challenges, she will need to strike a fine balance for maintaining the growth momentum amid sticky inflation. Her continuation in the position of Finance Minister also comes at a time when India has posted 7 per cent plus Gross Domestic Product (GDP) growth rate from the last three years yet is faced with significant challenges in the form of muted agricultural growth, weak exports and private investment amid flagging consumption demand.

In the most recent GDP data release for the January-March quarter on May 31, Private Final Consumption Expenditure (PFCE), an indicator for consumption demand, dropped as a share of GDP to 52.9 per cent — the lowest level in the 2011-12 base year series. For the full financial year 2023-24, consumption expenditure grew by 4 per cent, the slowest growth rate in the last two decades excluding the pandemic year.

The outlook on growth of the Indian economy remains robust, as per the Reserve Bank of India (RBI), given the government’s sustained focus on capital expenditure while maintaining fiscal consolidation.

The government has been focusing on fiscal consolidation over the last few years, with an aim to bring down the fiscal deficit to 5.1 per cent of the GDP in 2024-25 and reduce it further to below 4.5 per cent in 2025-26. In her 2021-22 Budget speech, Sitharaman had outlined the goal of 4.5 per cent fiscal deficit by 2025-26. “We hope to achieve the consolidation by first, increasing the buoyancy of tax revenue through improved compliance, and secondly, by increased receipts from monetisation of assets, including Public Sector Enterprises and land,” she had said.

For the last financial year 2023-24, the government was able to curtail the fiscal deficit at 5.6 per cent of the GDP, lower than 5.8 per cent outlined in the revised estimates on account of better-than-expected tax revenues and lower subsidy payouts.

Strong corporate balance sheets, rising capacity utilisation, double digit credit growth, healthy financial sector, and the ongoing disinflation are likely to be growth levers for the economy.

In recent years, the government has upped its focus on capital expenditure in a bid to improve infrastructure, support employment creation, growth, and is expected to continue in the coming year as well. In the year ended March 31, the Centre’s capital expenditure stood at Rs 9.5 lakh crore, 28.3 per cent higher than the year-ago period.

However, one of the most pressing challenges for the incoming government is to boost demand as that would be a crucial factor for stepping up the subdued private investment cycle. Also, geopolitical tensions, geoeconomic fragmentation, global financial market volatility, international commodity price movements and erratic weather developments pose downside risks to the growth outlook and upside risks to the inflation outlook.

To generate employment, especially low-skilled jobs, through a fillip to investments and growth would also be a challenge to the new government. Even as overall labour force participation, workforce participation and employment rates improved in India in recent years, the employment conditions have remained poor amid concerns over disguised employment in agriculture with a higher share of workers and reversal of transition to non-farm employment. Concerns over quality of jobs are there, with a higher proportion of unpaid family work among youth and women than adults along with stagnant wages.

With the full budget for financial year 2024-25 expected to be presented in Parliament during the first fortnight of July, Sitharaman has a task cut out to do the balancing act of fiscal consolidation amid welfare measures which may be required to spur demand and investments to boost growth.

Some recent measures such as the provision in the Income-Tax Act in Budget 2023-24 that aimed to secure payments to micro, small and medium enterprises (MSMEs) within 45 days of supply of goods or services has resulted in several issued including large companies cancelling orders to registered MSMEs and placing these with unregistered MSMEs. The issues are likely to be addressed in the upcoming Budget in July.