Budget 2023 should lay the path to 2047

What are some of the good things in the earlier two budgets? First, they were transparent on fiscal deficit numbers by including the earlier off-budget numbers. Second, they gave a push to capital expenditure and infrastructure. Third is the path towards fiscal consolidation. The next budget will, hopefully, continue these three good measures.

The two main drivers of GDP growth are investment and exports. It is known that the investment rate (gross capital formation as per cent of GDP) has declined from 39 per cent in 2011-12 to 31 per cent in 2019-20. If India wants to become a developed country by 2047, the investment rate has to increase to 36 per cent or more. In the last few years, the government has increased capex in the budgets from Rs 4.12 trillion in FY 21 to Rs 5.54 trillion in FY22 to Rs 7.5 trillion in FY23. In both FY22 and FY23, the increase in capex was around 35 per cent. The government should continue to expand capital expenditure. The RBI estimated that the fiscal impact multiplier for capital expenditure is 1.32 while for total expenditure (capital+revenue) it is 0.72. It indicates that only capex leads to a proportionately higher rise in GDP.

The question is whether the government should increase capex by 35 per cent and announce an outlay of Rs 10 trillion for FY24 in the next budget. The increase need not be at the same pace as in earlier two budgets. The high growth rates in the 2000s in India was mainly due to high levels of private investment, particularly corporate investment apart from the household sector. Private sector capex is showing a recovery after two years of the pandemic. The twin balance-sheet problem has receded now as companies are deleveraging and the banking sector has cleaned up its balance sheet. Credit growth is around 17 per cent. Apart from retail, corporate credit growth is also reviving. The PLI (production linked incentives) scheme may attract some investment. But, in order to promote private investment, measures may be needed to achieve price, fiscal and financial stability, to ensure policy certainty, and improve ease of doing business including reducing the cost of business.

Regarding the budget, medium-term fiscal consolidation is important given the high combined fiscal deficit of around 9 per cent and public debt of nearly 90 per cent. Interest payments of the central government constitute 24 per cent of the budget and 43 per cent of the revenue receipts. The government may stick to the fiscal deficit target of 6.4 per cent in FY23 because of higher revenues and higher nominal GDP growth of 15.4 per cent. Over the medium term, bringing down the fiscal deficit to 3 per cent to 4 per cent is important for raising private investment.

The second driver of growth is exports as it is one of the main engines of growth and employment creation. For higher growth of exports, the country needs a liberal, stable and consistent trade policy regime. Unfortunately, government policies with respect to international trade have turned increasingly protectionist. International trade is mostly dependent on global value chains. Import duties hamper this process because they increase the cost of importing, thereby disrupting the production chain. The “Look East” policy is also important.

Regarding the template for the next 25 years, the government has to focus on both short and long-term factors. In the short term, monetary and fiscal policies may have to support growth and take care of the global headwinds so that these policies would not lead to disruption of growth.

Similarly, India has to address its long-term structural problems if it wants to be a developed country by 2047. While there has been recovery from the pandemic, there still remain concerns for medium to long-term growth. The challenges lie in achieving high and sustainable GDP growth, creating sufficient number of quality jobs, achieving a low and stable inflation and financial stability, and addressing climate change.

India has a major advantage of the demographic dividend. Apart from raising productivity and boosting private investment, education and skill development call for special attention. Another long-term challenge is the structural transformation. Indian agriculture has to be transformed and farm incomes raised. Labour intensive manufacturing is considered the solution for structural transformation, labour absorption and exports. There are some apprehensions regarding the manufacturing sector: There is scope for expansion in manufacturing including the MSME sector. Manufacturing and services should be promoted simultaneously. Quality in health and education sectors and skills is another structural issue. Reducing carbon emissions and accelerating energy transition is a challenge and opportunity. Digital transformation can contribute substantially for higher growth in future. The impact of technology and mechanisation on employment has to be assessed. But, the low participation rates of women in the labour market are also a concern.

India today is the fifth largest economy. It is likely to overtake Germany and Japan and become the third largest economy in a decade. However, India ranks 142 out of 197 countries on per capita income. As former RBI governor C Rangarajan mentioned recently, India has no choice but to grow fast given the present level of per capita income. The role of states is equally or more important in raising growth and jobs.

The writer is Distinguished Professor, IBS, Hyderabad and former Vice Chancellor, IGIDR, Mumbai