India’s economic growth in real terms could slow to 6-6.8% (baseline rate of 6.5%), from an estimated 7% in the current fiscal and 8.7% last year, the Economic Survey 2022-23 tabled in Parliament on Tuesday predicted. It said the inflation challenge in FY24 “must be a lot less stiff than it has been this year”, but added that the monetary and fiscal authorities would need to be as proactive and vigilant as they have been this year.
Having moved on after its encounter with the pandemic, the Indian economy returned to “the pre-pandemic growth path” in FY23 and is “prepared to grow at its potential in the medium term”, the Survey said, pinning hopes mainly on structural reforms already undertaken. For the medium term, the Survey pegged average growth at 6.5%, and said the potential GDP growth would rise to 7-8%, without a specifying any timeframe.
The survey’s view of growth for FY24 is more optimistic compared with that of the IMF (6.1%), S&P (6%), Fitch (6.2%), Goldman Sachs (5.9%) and Nomura (5.2%).
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The Survey marks a first in years by not making any reforms recommendations and is more an analysis of the government’s achievements on the economic front so far.
Lead-authored by chief economic adviser V Anantha Nageswaran, the Survey saw “brisk growth momentum” and a solid revival of private investments, views not shared by many independent analysts.
It recommended fiscal consolidation and continued public capex thrust at this juncture, as it will help crowd in private investments. It did cite elevated public debt, and multiple headwinds on the external front that reflect on the country’s current account balance, domestic inflation and the rupee’s strength, but listed several upsides to India’s growth outlook, including a “stable” inflation rate below 6%.
With the Union Budget for FY24 to be unveiled on Wednesday, most analysts expect the Centre to meet its fiscal deficit target of 6.4% of the gross domestic product (GDP) for the current fiscal, helped by buoyant tax revenues. Sticking to a linear path of consolidation, the Centre may target to reduce the fiscal deficit to 5.8-6% in FY24 and keep the medium-term fiscal goal of 4.5% for FY26.
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The sanguine tone in the Survey is not strictly in consonance with assorted facts about the economy, including a recent uptick in the unemployment rate. The debilitation of the economy’s productive capacity is visible. There is an erratic pick-up in capacity utilisation, but that doesn’t bear out an ongoing new private capital formation cycle as the survey suggests.
Private consumption is also projected to weaken substantially in the second half of the current year, as per the first advance estimate of national income by the National Statistical Office for FY23. Reorganisation of the economy and removal of market rigidities and concentrations are required to harness the economy’s inherent growth potential.
The Survey, however, cited the lagged effect of elevated public capex in recent years, a private-sector capital formation cycle in the making, accelerated credit flows to all sectors of the economy, including the MSMEs, and “a return of capital flows” to India as growth impetuses.
It noted that growth drives the fiscal balance in India, but added that “fiscal discipline could turn into fiscal stimulus in future”, as it would bring down the government’s cost of borrowing, lowering the current high share of interest payments in public expenditure and making more money available for economic development and social welfare.
The Centre, the Survey said, should continue to incentivise the states for reforms and higher capital spending to ensure “a stronger general government”. The capex-led growth strategy will ensure sustainable debt levels in the medium term, it added.
According to the Survey, the economy has started benefiting from the efficiency gains resulting from greater formalisation, higher financial inclusion and new economic opportunities created by digital technology-based economic reforms. In an interview to FE later in the day, Nageswaran said: “While reforms before 2014 addressed product and capital markets, reforms since then have focused on enhancing the ease of living and doing business to improve economic efficiency. This is a continuous theme. Social inclusion and inclusive growth is also a late motif…Making sure the household or business is able to operate in a manner that is as free as possible should remain an enduring theme.”
According to the Survey, it is not wishful thinking that 2023 will show less macroeconomic volatility than its preceding financial year. It noted that the Reserve Bank of India has projected headline inflation at 6.8%in FY23, which is outside its target range, but said: “At the same time, it is not high enough to deter private consumption and also not so low as to weaken the inducement to invest.”
The upside to India’s FY24 growth, the Survey believes, will arise from the following: continued normalisation of global supply chains; inflationary impulses from the opening up of Chinese economy being neither significant, nor persistent; recessionary tendencies in the advanced economies triggering a cessation of monetary tightening and return of capital flows to India; a “stable” domestic inflation rate below 6% and a resultant revival of animal spirits and private investments.
The Survey did acknowledge downside risks from a ‘higher for longer’ stance by global central banks to counter high inflation. While export growth will inevitably ease in a slowing global economy, a likely easing of crude oil prices, resilience of net services exports and buoyancy in inward remittances will prop up the current account, it said.
India’s current account deficit, which stood at a 10-year high of 4.4% in Q2FY23, is expected to ease in the second half of this fiscal and remain within “sustainable limits”, with further moderation expected in FY24, the Survey said.
