Economic Survey 2022-23: Survey banks on fiscal discipline and higher capex to drive growth

The other takeaway from the Survey is the government’s inclination to continue with higher capital expenditure that will crowd in private investment and is important to driving growth.

While India is seen as the fastest growing economy in the world, the baseline 6.5 per cent growth estimate is higher than the 6.1 per cent forecast for FY24 by the International Monetary Fund (IMF) in its World Economic Outlook update released Tuesday. Some analysts said the Survey’s 6.5 per cent growth projection for the next financial year seems over-optimistic and hence carried the risk of fiscal slippage by the government.

For the current financial year i.e., 2022-23, the Survey has projected a growth rate of 7 per cent, which is slightly higher than the 6.8 per cent estimated by the Reserve Bank of India in its December 2022 monetary policy.

At a press conference after the Survey was tabled, Anantha Nageswaran said the economy has recovered from the impact of pandemic and is expected to record a 6.5-7 per cent growth rate for the rest of the decade. “My optimism is that in the coming decade, rest of the decade, the potential GDP growth, without taking into account export potential, because the global economy is still rife with uncertainty, the growth rate would be around 6.5-7 per cent, rather than between 6 per cent and 6.5 per cent,” he said.

He said the global slowdown had a couple of “silver linings” for India – lower oil prices and a better current account deficit than what is projected now. Strengthening of the corporate balance sheets, well-capitalised public sector banks and increase in credit growth to the industry seem to suggest that prospects for capex investments by companies are brighter, he said. Credit growth of micro, small and medium enterprises (MSMEs) has grown 30 per cent since January 2022, he added. However, uncertainty on commodity prices and volatility in crude oil are major challenges. During the coming year, inflation is likely to be “well behaved” barring headwinds, the CEA said.

The Survey has called for “entirely” dismantling the LIC (licensing, inspection and compliance) regime to accelerate economic growth, harnessing women power (nari shakti), energy security and energy transition, education and skilling, administrative reforms and enforcement of contracts, and sought determined efforts to make public sector asset monetisation scheme successful, besides addressing by states of the power sector issues. “If asset monetisation revenues are used to reduce public sector debt, the sovereign credit rating will improve, leading to a lower cost of capital,” he said.

When asked about the Indian economy touching the 8-per-cent growth rate mark, he said, “Even without export growth kicking in we can strive for 8 per cent growth and be able to achieve it.” “The reason why we should be looking at 8 per cent or 9 per cent (growth) at this point of time is because in the first decade global economy was booming and now it is in slowdown phase… if global economy does better and if efforts to plug in global supply chain succeed and exports growth kicks in, that would help in pushing potential growth to rise from 7 per cent to 8 per cent,” he said.

Experts, however, cautioned that the optimistic growth outlook carries seed for fiscal slippage. “The Economic Survey, released as a precursor to the FY24 Union Budget, provided a particularly optimistic growth outlook, while emphasising the need to continue to focus on capex and fiscal consolidation. We believe that over-optimism on growth may limit the extent of potential expenditure consolidation and boost revenue projections in the FY24 Budget. This in turn would make it difficult for the government to fiscally ‘walk the walk’ if growth prospects disappoint, as we expect,” Nomura said in a report. Nomura expects the Indian economy to grow 5.1 per cent in FY24.

The Survey said the upside to India’s growth outlook comes from (i) limited health and economic fallout for the rest of the world from the current surge in Covid-19 infections in China and, therefore, continued normalisation of supply chains; (ii) inflationary impulses from the reopening of China’s economy turning out to be neither significant nor persistent; (iii) recessionary tendencies in major advanced economies triggering a cessation of monetary tightening and a return of capital flows to India amidst a stable domestic inflation rate below 6 per cent; and (iv) this leading to an improvement in animal spirits and providing further impetus to private sector investment.

It, however, pointed out risks from widening current account deficit, likelihood of further interest rate increases in the US, the challenge of the depreciating rupee, and further possible loss of export stimulus along with monetary tightening exercise globally, with entrenched inflation expected to prolong the tightening cycle.

It listed capital expenditure by the Central government, which increased by 63.4 per cent in the first eight months of FY23, as another growth driver of the Indian economy in the current year and said it is crowding in the private capex since the January-March quarter of 2022.

Referring to the impact of the Covid-19 pandemic, the Survey said the Indian economy appears to have moved on from the impact of the pandemic and is positioning itself to ascend to the pre-pandemic growth path in FY23. In the current year, India has faced the challenge of reining in inflation that the European strife accentuated. But measures taken by the government and RBI, along with the easing of global commodity prices, have finally managed to bring retail inflation below the RBI upper tolerance target of 6 per cent in November 2022.