At 8.2 per cent, India’s GDP growth in fiscal 2024 was 170 basis points higher than what last year’s Economic Survey had projected. A subdued agricultural sector and a host of global risks failed to dent the growth momentum. The higher growth, together with improved tax collections and extra dividend payout from the Reserve Bank of India (RBI), has increased the fiscal space. External buffers are also strong owing to a low current account deficit and ample forex reserves. Moreover, high-frequency data for the first quarter of this fiscal reflects a healthy growth trajectory. The S&P Global Purchasing Managers’ Index (PMI) was in a healthy expansion zone, at 57.3 and 58.1 for manufacturing and services, respectively. Balance sheets of corporates and banks are also well-placed to support growth.
All these point to a Goldilocks setting for the upcoming budget.
That said, some nuances of macroeconomic performance indicate all is not hunky-dory. Heightened global uncertainty, elevated food inflation amid climate risks and slow recovery in private investment are a few issues the Economic Survey highlights, and rightly so. These are also signals for the budget to make amendments to policy.
At the surface, global growth has remained surprisingly resilient. The IMF forecasts global growth at 3.2 per cent in 2024. But such optimism can be derailed by geopolitical uncertainties, increased indebtedness and escalating tariff friction. If these risks play out, their effects could spill over to India. Over the years, India has become more integrated with the global economy in terms of trade and capital flows. The Survey acknowledges these risks and bats for strong external and fiscal buffers.
For this fiscal, the Survey projects GDP growth to moderate to 6.5-7 per cent, in line with CRISIL’s forecast of 6.8 per cent and a tad below the RBI’s forecast of 7.2 per cent. Elevated interest rates and regulatory actions to curb retail credit growth will temper GDP growth. And, fiscal consolidation will imply a lower stimulus to overall growth.
Although the government has slightly greater fiscal elbow room than it had when it presented the interim budget, it is unlikely to splurge all of it on boosting the economy. Some of it may be utilised to prune the fiscal deficit and gradually dial down debt. Over its last two terms, the government has broadly maintained fiscal discipline, and this stance is unlikely to change.
The Survey notes that investments are largely government and household-driven and the private corporate sector is yet to decisively take the baton. That is despite healthy corporate and bank balance sheets, stepped-up public investment in infrastructure, a competitive tax regime, and a more supportive policy environment aided by the Production Linked Incentive scheme. In the private sector, hiring and compensation growth will need to keep up with the high profitability growth seen in the last few years, the Survey points out. This will be required to shore up demand visibility.
We believe the government also needs to focus relentlessly on improving infrastructure and logistics and incentivising research and development spending to catch up with India’s Asian competitors. Indian corporates fear the ongoing tariff wars could accentuate overcapacity and lead to dumping of goods into India.
In this environment, incentives may be needed in key strategic manufacturing sectors to attract private corporate investments. Private consumption is punching much below its weight in GDP. Last fiscal, private consumption grew 4 per cent — half of GDP growth. This was the slowest growth in two decades, except during the pandemic year 2020-21.
Some transitory factors that slowed private consumption, particularly in rural areas, such as the hit to agricultural GDP and high food inflation could reverse this year with a normal monsoon. That said, urban consumer sentiment is weakening as the impact of rate hikes and softening growth in services (a dominant share of which is in urban parts) plays out. The RBI’s consumer survey reflects this trend.
The budget, therefore, may need to support employment-intensive activities such as construction, which can augment income and demand in the short term.
The medium- to long-term policy focus should be on enhancing growth prospects and augmenting the ability of people to participate in it. Employment creation and bridging the skills gap at the entry level — especially in manufacturing and in anticipation of the likely disruption from generative artificial intelligence — should be a priority. The Economic Survey points out that employment generation in the IT sector slowed considerably in the last two years.
The stubbornly high food inflation has emerged as a key concern for the government and RBI. Food has significant weight in the consumer basket and is exposed to the vagaries of the weather, including climate change. Heatwaves and changing monsoon patterns as a result of climate change have made Indian agriculture more vulnerable. This has created upside risks to headline inflation on account of high food prices and is holding the RBI from cutting rates. The Survey calls for stronger price-monitoring mechanisms and higher production of essential crops such as pulses and edible oils.
We believe strengthening storage and transport infrastructure, fast-tracking efforts in food processing and development of climate resistant crops are imperative for an enduring reduction in food inflation.
The government needs to kick off the next level of reforms in land, labour and agriculture. Since they fall under the Concurrent List, central and state governments must move in tandem — this requires deft consensus-building.
That said, sustainable high growth requires acceleration of reform efforts whose payoffs may not be immediate. The Survey believes the economy can grow at 7 per cent per year if “we can build on the structural reforms undertaken over the last decade”.
Joshi is Chief Economist and Deshpande is Principal Economist, CRISIL Limited
