Opinion Economic Survey 2023: A broad-based recovery has lifted all major sectors above pre-pandemic levels. But that is about to be tested by slowing global growth

At home, the global slowdown will hit exports and export-linked segments. The full-blown impact of rate hikes by the RBI will kick in. And India will continue to reckon with volatility in crude and commodity prices, much like everywhere else. The Survey also highlights the risks from an elevated current account deficit amid challenging external financing conditions.

Even as it acknowledges these risks, the Survey expects India’s real gross domestic product (GDP) growth for fiscal 2024 to slow to about 6.5 per cent — slightly more optimistic than projections by multilateral agencies and CRISIL’s forecast of 6 per cent. It expects the high and broad-based domestic inflation seen this fiscal to ease next fiscal. CRISIL’s forecasts echo this, at 5 per cent for CPI inflation, and even lower for WPI.

Not all the views and suggestions of Economic Surveys have been reflected in past Budgets. Yet, the document serves as a useful policy mirror to the past year’s actions and sets the stage for what lies ahead in the near and medium term. In the uneasy environment of tight financial conditions and cautious optimism on inflation, this year’s Survey suggests calibrated fiscal consolidation. We agree with this stance.

The fiscal deficit for the coming fiscal should move towards the glide path that targets 4.5 per cent of the GDP by fiscal 2026, as committed to earlier. This is important because the benefit of high nominal GDP for the fiscal deficit is likely to fade in the coming months. Slowing growth and high borrowing costs will worsen the debt dynamics. India has one of the highest debt-to-GDP ratios in its peer group. Fiscal consolidation will also complement monetary policy. A lower fiscal deficit-to-GDP ratio will help reduce pressure on domestic interest rates, the Survey opines.

Since the pandemic, the government has prioritised spending on infrastructure creation, relying more on direct budget support and less on off-budget financing. The Survey recognises this as a sound way to create higher multiplier effects in the economy over the medium term and help crowd in private investments.

Robust government capex has played a key role in lifting investment growth this fiscal, too. While the central government frontloaded its capex in the first half, states are expected to ramp theirs up towards the end of the fiscal. According to the first advance GDP estimates, investment expenditure is set to reach 34 per cent of the GDP (in real terms) in fiscal 2023, finally surpassing the fiscal 2014 levels.

The private sector in India is currently primed for undertaking investments with healthy balance sheets, cash reserves and low leverage. However, economic uncertainty is holding the “animal spirits” back, although some corporates are pencilling in a higher capex in the coming fiscal.

That said, government and private capex are not substitutes for each other, but complementary. While the government typically focuses on infrastructure creation, corporates invest in manufacturing. Given the uncertain environment, we believe that it would make sense for the Budget to continue propping up capex while facilitating private investments. Creating the fiscal space for doing this will indeed be challenging. In particular, the slower rise in nominal GDP would impact the momentum in tax collections. Space for capex, therefore, can only be created by reorienting spending from bloated subsidies and going on a divestment and asset monetisation overdrive.

As the pandemic’s effects ebb, the time is ripe for re-orienting the economic strategy to the changing world order and developing a medium-term plan that could help India grasp emerging opportunities — notably the shift in global manufacturing out of China — while also mitigating challenges such as providing employment for the growing Indian workforce, and climate risks. The Economic Survey devotes an entire chapter to these.

Growing domestic manufacturing remains a long-standing ask in this context. Its share in the GDP has been stagnant at 17-18 per cent for over two decades. The global search for alternative manufacturing bases since the pandemic is widely held as India’s “China moment”. The Survey considers India ready to seize the occasion, thanks to the structural reforms carried out between 2014 and 2022, and the progress made by production-linked incentive (PLI) schemes to attract private investments. We agree that the PLI schemes have quickened the pace of private investments. However, more needs to be done on ease of doing business and simplifying legal bottlenecks to create an upside to India’s medium-term growth prospects, pegged at 6.5 per cent in the base case by the Survey.

On climate change, the Survey recognises India’s rising vulnerability to climate-related risks. It details how the government is creating a conducive environment and contributing to the international policy agenda regarding the green transition. We believe a bigger financial commitment is in order, though. If India has to meet its net zero goals, fiscal policy must rapidly create the right environment for a boost in private sector participation and green investments. The Budget, it is hoped, will announce specific steps to support small enterprises’ transition to a lower carbon footprint. To mitigate the impact of climate change on the food economy and smoothen price volatility, the Budget could focus on measures such as increasing allocations to, or incentivising the development of, extreme-weather-resistant crops, warehousing and food processing.

The Survey touches upon wide-ranging aspects that would shape India’s outlook in the coming fiscal year and the medium term. How much of that will a pre-election year Budget foreground? We are about to find out.

Joshi is chief economist and Tandon is economist at CRISIL Ltd