What are the challenges, possibilities and options in the budget

in the year 2022 With a relatively high level of economic growth and low inflation compared to most G20 countries, India has weathered global shocks comparatively better. Although India’s fiscal and current account deficits remain high, it has been able to better manage the country’s outflow of foreign exchange due to adequate reserves and a well-designed exchange rate policy. India should grow by more than 6.5 percent in the financial year 2022-23 and now inflation below 6 percent may surprise many people.

The US and Europe are headed for recession as these places have adopted the tight monetary policies needed to control rising inflation. On the other hand, China is troubled because of its own Covid policies. In such a situation, India appeared better in 2022 among the world’s major energy importing countries. In the G20, only Saudi Arabia showed a faster growth in gross domestic product (GDP), made possible by higher oil prices. Compared to most of the other countries, India has managed better in the year 2022 but now the question is, what about next? Many of the uncertainties and risks of last year continue in 2023 as well. The ongoing conflict in Iran and aggressive attitude of China can be risky for India. India’s GDP growth rate is projected to be 6.5 percent, which would be difficult for many countries to achieve. But even at this rate, it will take 8-9 years for India to cross the $4,100 level, which is the World Bank’s upper-middle income category and where Iran and Indonesia are today. Of course we should try to do better.

With the global economy and trade slowing down, many experts have advised following the approach of tightening the fiscal position. It is not clear why fiscal tightening would make the Indian economy more risk averse. In fact, even the International Monetary Fund has pointed out that quite the opposite is more likely to happen. In the absence of fiscal consolidation, the current account deficit will remain high, making India’s macroeconomic stability more uncertain.

With India’s public debt at over 80 per cent of GDP and a rising interest bill (over 3 per cent of GDP), fiscal consolidation in the medium term is essential not only for broad-based stability, but also without private investment It is also not possible to improve the economy which is the key to rapid growth in the economy. Looking back, the period 2000-2010 has been notable for one thing, and that is that India’s per capita GDP tripled during this decade. During this period, corporate investment exceeded 15 percent for the first time, a high level of total private investment, and stood at 25–30 percent of GDP. Since 2010, India’s per capita GDP has not even doubled as private investment has declined. We need to increase investment again to those levels for GDP growth of 7-8 per cent. If private investment as a share of GDP is to be increased to around 25-30 per cent of GDP as before, then a fiscal deficit of around 3 per cent of GDP and a current account deficit of 1-2 per cent of GDP is more appropriate. Anything more than this would simply mean that it would be unviable and unsustainable from a macro-economy perspective as private sector investment would shrink and private capital expenditure would not be increased.

Will we see such improvement in the years to come? The capacity utilization rate, which averaged close to 80 per cent in the high growth decade of 2000–2010, is now much lower, although it has improved to an average of over 70 per cent in several key sectors and as high as 75–80 per cent in some. touching the level. The banking sector appears to be all set to revive private credit. Most of the demand for retail loans has increased in the recent past and it has shown improvement but corporate loans can also see improvement. Competitiveness remains an issue as the cost of doing business is high and this is where the government should focus and not rely only on production linked incentive subsidies to increase investment. Energy prices and logistics costs are high and labor law reforms remain largely on paper, except in a few states. Global companies want to move out of China but it is not necessary that they come to India. So they will try to go to the most competitive places. Apple’s decision to come to India is positive but one is not enough, we need more companies. Non-corporate investment largely comes from public sector spending on infrastructure, and for this reason the government’s efforts to maintain and even increase public capital expenditure even during bad times should be welcomed. In addition to higher allocations for public sector capital expenditure, fine-tuning the regulatory environment and procedural delays in investment projects will help attract genuine private capital that can accelerate climate-friendly investments and help India address its climate challenges at this time. There is also a need to move forward under the targets.

With general elections due in 2024, and a budget for FY 2023-24 may be the only option for fiscal consolidation, but it will not be easy. Fertilizer subsidy has increased wildly. The recent changes in the free grain scheme under the Public Distribution System (PDS) indicate that the election target is definitely on the mind of the government. Scrapping the Pradhan Mantri Garib Kalyan Anna Yojana saves money in the short term, but the free PDS will exacerbate financial problems in the medium term as pressure to increase the minimum support price (MSP) also mounts closer to elections.

If fiscal consolidation is to be brought from 6-7 per cent of GDP to 4.5 per cent of GDP in the medium term without any cut in public capital expenditure, then fertilizer and other subsidies should be rationalized and included in PM Kisan payments. Along with this, there should be a change agenda in cash transfers instead of free PDS. Taxes and other revenues should also increase by 2-3 per cent of GDP, especially when our defense needs are increasing as China appears aggressive. For this, further reforms in the Goods and Services Tax and an accelerated privatization program will be required. In the medium term, China could trouble it in the year of India’s G20 presidency. The best way to permanently counter China is to match it economically. Fiscal consolidation will be needed if India is to achieve sustained private sector-led growth of 7-8 per cent in the medium term. The stakes in the Budget for the year 2023 and beyond are indeed high.
(The writer is senior visiting professor at ICRIER)
Ajay Chhibber