The Economic Survey noted the benefit that the Indian policymakers derived from an unanticipated growth of tax revenues in 2022-23. While the GoI’s budget estimated a nominal GDP growth of 11.1%, the likely realisation as per the NSO’s First Advance Estimates is 15.4%. This resulted in an unanticipated spurt in GoI’s gross tax revenue (GTR) growth which may turn out to be close to 15.5% in the current year. In 2023-24, however, the nominal GDP growth may be closer to 11%. The chances of any upward surprise are weak. This is due to the adverse impact of the continuing global economic slowdown which would continue to adversely affect India’s export growth. Maintaining a buoyancy of close to 1, the likely growth in GoI’s GTR may also be 11%. This may have an adverse impact on government’s capacity to stimulate demand through capital spending in 2023-24 as compared to 2022-23.
The Survey has projected a real GDP growth of 6.5% in its baseline case. Its overall assessment gives a broader range of 6% to 6.8% which acknowledges that the factors affecting growth remain unpredictable and the actual performance would largely depend not only on global developments but also on a careful calibration of fiscal policy. If the global economic headwinds gather further momentum, the likely real growth may be closer to 6%. On the other hand, if the GoI is able to mount a strong fiscal stimulus activated through its own capital spending and by incentivising the states to act similarly, it may be possible to reach the upper end of this range at 6.8%.
Three factors would hold the growth rate down: (1) accentuation of global slowdown in 2023-24, (2) continued upward rise of the US Fed rate, and (3) accelerated depreciation of INR vis-à-vis the dollar. These negative factors may be counterbalanced by three positive forces. First, the likely fall in global crude prices would benefit India’s current account balance and lower the cost of inputs for the private sector. Second, there would be a reduction in the magnitude of all petroleum price linked subsidies in the GoI’s 2023-24 budget. Third, India may be in a position to start reducing the policy interest rate once both CPI and WPI inflation gather a downward momentum. With these developments, the interest rates may fall, and private investment may move into an upward cycle, supplementing GoI’s effort to support capital expenditure. Much would depend on GoI’s call regarding the pace of fiscal consolidation vis-à-vis support to capital spending. It is likely that the GoI’s fiscal deficit to GDP ratio in 2023-24 may be limited to 5.7% to 5.8% which may allow its capital spending to grow at about 15%.
The Survey notes that multilateral organizations such as the IMF have projected India’s 2024-25 growth at 6.8%. This means that 2023-24 growth may constitute a transitory dip between a growth of 7% in 2022-23 and 6.8% in 2024-25. In the medium term, according to both the IMF and the Survey, India may be able to show an average real GDP growth of 6.5%. The Survey has identified three growth drivers for ensuring a robust medium-term growth for India. These are: (1) sound and healthy financial system, (2) digitalization reforms, and (3) opportunity to benefit from the diversification of global supply chains. The continued emphasis on infrastructure expansion through accelerated government capital spending can even push up the potential growth to a range of 7-8% in the medium term. One likely weakness in the short to medium term relates to the continuing pressure on India’s current account deficit. Thus, earlier the geopolitical challenges resolve themselves and the global supply chain disruptions settle possibly in favour of India, the sooner India can reach its true potential growth.
(The writer is chief policy advisor, EY India. Views expressed are personal.)