– By Sanjay Kumar and Ankit Kasare
India’s growth story marches on! The latest advanced estimates of GDP Q3 for FY 2023-24 are stupendous, bucking all the forecasts, and staying above 7.3%; H2 GDP growth as per the Indian government was 7.7%. The forecasts now, with this upbeat mood, suggest that India is quite likely to grow close to 7.3% in FY2023–24. This is on the back of 7.2% in the previous FY.
These developments are not new. They have a strong background. Digitization, infrastructure development, PLI scheme to create high-end manufacturing capacity, resilient corporate and financial sector balance sheets, and improved competitiveness through exports, have been the pillars of India’s journey. Forthcoming budget, encompassing both votes on account and the budget in July 2024 after the new government comes, would look to pursue some of the above, also adding a few more. Let us propose a few bold yet crucial ideas to advance the growth agenda for the government.
Tax reforms
Current tax reforms have largely been in tax administration. Taking further measures to further improve digital delivery of the tax services can be continued as core of the reforms. On policy, the government should view tax as a tool for fostering growth, investment, and equity. The new tax regime, somewhat restrictive, can be made more acceptable by introducing deductions for home loan interest. Second, instead of raising tax rates above 40% on the ultra-rich, it is suggested to bring a balanced approach. Otherwise, this group looks for alternate country residence. Third, the foreign bank branches are taxed at the rate of 40% plus. This is much higher than our base rate of 22%, thereby creating disparity in corporate tax rates for foreign bank branches. Aligning them around 30%+ can encourage foreign banks to have increased operations in India.
Infrastructure spending
Infra spending, physical and digital, over the last 5-7 years has been a major driver of GDP growth, resulting in India’s infrastructure ranking rising from 52 in 2018 to 44 in 2023 on the Global Competitiveness Index. No doubt, this has created significant economic stimulus, compared to other forms of spending. Acknowledging finite government capacity, a shift towards greater private sector involvement (currently at 85:15 ratio) is essential for infra-augmentation and acceleration. Tax measures, similar to the tax consolidation method used in Malaysia and other countries, can be employed to incentivize private sector participation, albeit with anti-abuse provisions. India also needs to shift away from carbon-heavy infrastructure, given its commitment to climate goals. So, more focus on green energy, electric vehicles, and inland waterways and ports will be required. Urban infrastructure improvement should also remain a priority.
Better farm productivity
Despite significant progress in the services industry, agriculture remains a priority sector for India, employing over 50% of the workforce but contributing about 15% to the GDP. The challenge is amplified by the impact of climate change on agriculture. To address this, enhancing productivity per unit of land is imperative, focusing on increasing yields, diversifying to higher value crops, and improving value chains to reduce marketing costs. Embracing digital farming, including smart irrigation systems, can optimize water usage and reduce the risk of crop loss. This efficiency may help cut down the current farm subsidy, currently at 2% of India’s GDP. Additional measures such as investment in agricultural research, promoting farm mechanization, and strengthening agricultural extension services are equally crucial.
Credit flow to MSMEs
Credit gap for the MSMEs in India is estimated to be Rs 25 trillion, almost 62% of the union government’s current FY budget. The sector, severely impacted by the Covid-19 pandemic, is crucial for sustaining millions of workers. MSMEs continue to face revival challenges. Actually, credit flow share to the MSMEs sector has declined, notwithstanding its increase in absolute terms. Also, credit problem in urban areas is more than 39%; 9% higher than in the rural areas. Despite challenges of informality and productivity, addressing the sector’s needs is imperative. Bringing measures such as dedicated loan processing cells in banks, promoting online loan applications can contribute to MSMEs’ revival.
Boosting export growth
India’s service exports are growing, led by a 6% growth in Global In-house Centers. It is the merchandise exports that has been a major concern for the government. As per CSO estimates, net exports were (-)8.2% over last FY period, creating a drag of 144.2% on the GDP growth as compared to 79.7% last FY. All these suggest a different policy approach. Enhancing India’s Global Value Chain output, which currently stands at 3.17%, and leveraging existing and potential trade agreements are key measures. While the PLI schemes for 14 sectors, with a Rs 1.97 trillion outlay, are positive, a revisit is crucial due to the limited expenditure so far. Trade policymakers should assess India’s exports to major markets, particularly the US. Despite benefiting from China+1, India’s scale is much less compared to Vietnam and Indonesia, necessitating a thorough reassessment, and a market-specific strategy.
There can certainly be more suggestions. Given the upcoming budget is a votes-on-account, expectations for the government are to stay on fiscal consolidation and avoid populist spending ahead of the general elections. New government will have a task cut out to address some of the existing weaker areas and continue on a high, and hopefully higher, GDP growth path.
(Sanjay Kumar is the Partner; and Ankit Kasare, Assistant Manager, at Deloitte India.)
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