The first advance GDP estimates from the National Statistical Office indicate that the Indian economy will grow 7.3 per cent this fiscal year, faster than the Economic Survey’s prediction of 6.5 per cent made in January 2023. The survey had then noted that the Indian economy appeared more upbeat than most.
India will continue to be the fastest-growing major economy despite a sharp slowdown in agriculture and various risks and uncertainties playing out globally. The Russia-Ukraine conflict and the intensifying Middle East crisis have so far not dented the country’s growth trajectory. Most other macros are also broadly in balance, with current account deficit in the safe zone, the currency being stable, and headline inflation expected to nudge down over the next few quarters.
Economic policies, specifically fiscal policy, have played a key role in shaping the post-pandemic growth recovery. The fiscal policy transitioned from a focus on welfare during the pandemic towards a public investment-driven growth strategy to accelerate a buildup in infrastructure. This was achieved while staying on the glide path of a reducing fiscal deficit/gross domestic product (GDP) ratio.
This has helped raise the productive capacity of the economy. National accounts data shows that investment has grown faster than GDP (both in nominal and real terms), with its share in GDP rising to 34.9 per cent this year, from 31.6 per cent in 2019-20. That said, the government needs to start moderating its budgetary support to capital spending. Bringing down the fiscal deficit to the committed 4.5 per cent of GDP by 2025-26 will entail a hit of 1.4 percentage points to GDP over the next two years.
This would imply fiscal rectitude in an election year. To be sure, the budget to be presented tomorrow is an interim one and the final budget will be presented after the elections. But extrapolating the current government’s past fiscal conservatism, fiscal numbers in the interim budget can be considered as final, assuming the government remains in power.
Delivering on this fiscal consolidation strategy is easy if growth remains strong. Amid the vicissitudes, the review report from the Finance Ministry expects the economy to grow close to 7 per cent next fiscal and suggests the possibility of India becoming a $7 trillion economy by the end of this decade. Healthy medium-term growth prospects are also reflected in the forecasts of multilateral agencies. We expect GDP growth to moderate to 6.4 per cent next fiscal, before accelerating thereafter, due to slowing global growth and tighter financial conditions globally and at home.
That said, for faster and sustained growth, it is critical that the private sector picks up the investment baton from the government. This will be important to preserve the medium-term potential of the economy while moving along the fiscal normalisation path.
Improving capacity utilisation, the Production Linked Incentive (PLI) scheme, a low-corporate-tax regime, and healthy balance sheets of medium and large-sized corporates augur well for a revival in capex, which has not seen a meaningful pick-up in the last decade. We believe that lowering compliance costs and providing stability in the tax regime can complement the existing favourable scenario in unleashing a broad-based revival of the investment cycle.
Unlike advanced countries, core inflation has corrected quickly in India and is at a comforting level of 3.8 per cent. Fuel inflation is -1 per cent. India’s headline inflation is yet to be brought under control, solely due to high food inflation. The underperformance of the agriculture and rural economy, coupled with high food inflation in an election year, can be worrisome. Agriculture punches far above its weight in GDP because it influences food inflation, which has a 40 per cent weight in the consumption basket, and a large portion of the population still depends on agriculture. Curbing food inflation requires supply-side measures and falls in the domain of fiscal policy.
Although central bank policy does not directly influence food inflation, it aims to prevent the transmission to other segments by keeping overall demand in check through interest rate hikes. Therefore, the RBI would be a bit wary of declaring an early victory on inflation and initiating quick rate cuts. This also implies that government policy will go into overdrive to bring down food inflation. We expect consumer inflation to settle at 4.5 per cent next fiscal, assuming normal monsoons and crude oil prices at around $80 per barrel.
Globally as well, inflation and interest rate cycles have peaked. However, the expectation regarding the timing and speed of rate cuts continues to evolve as US and Europe are still grappling with high core and headline inflation and tight labour markets. We anticipate that both the US Federal Reserve and Indian central bank would initiate rate cuts in the middle of this year. Therefore, monetary policy is unlikely to become growth-supportive, particularly until the first half of next fiscal.
Last year marked the highest annual temperature in recorded history, reminding us of the escalating climate risk. India is among the most climatically vulnerable countries. The country experienced its second hottest year since 1901 and driest August in 2023, according to the India Meteorological Department. A recent study by Council on Energy, Environment and Water highlights how monsoon patterns have changed in India over the last four decades, with increasing occurrences of excess and deficient rainfall.
This has wide implications, particularly for agriculture. India needs to step up research and development and take other complementary steps towards adapting to climate change, together with measures to limit it. And it must do so without hurting growth prospects. The review document also lists the “trade-off between energy security and economic growth versus energy transition” as a key challenge for the economy.
Over the near and medium term, domestic strengths such as healthy corporate and balance sheets, the government’s policy focus on infrastructure build-up, and the noteworthy progress on digitalisation provide comfort on the growth front. External markers for the economy also remain resilient.
Historically, growth spurts in India have resembled sprints rather than marathons. To transform the current growth uptick into a marathon, it is important for policymakers to ensure sound macroeconomic fundamentals, fast-track skilling of the larger population to enable their participation in the growth process, engage in pragmatic management of energy transition, and focus on reforms. A tall order, indeed.
Joshi is Chief Economist, CRISIL Ltd
