Growth rates across the world have declined and what’s more, international institutions such as the World Bank and the International Monetary Fund have periodically adjusted these downwards in recent times. The successive downward revisions are revealing–they reflect growing uncertainties in the global economy. The World Bank has projected a sharp slowdown in global growth from 2.9% in 2022 and to 1.7% in 2023 with advanced economies projected to grow by only 0.5% in 2023, much lower than 2.5% in 2022. For India, the growth projection is higher than major advanced and emerging market economies at around 6% for FY24, and yet it is still a full percentage point lower than in FY23, reflecting waning of the base effect due to the lockdown and the prevailing recessionary outlook for developed markets.
While the North American financial crisis of 2008 was tackled effectively by global policymakers through successful coordination among the G20 countries, the current crisis in the aftermath of Covid-19 and the war in Ukraine is proving to be a much tougher nut to crack. Add to this the looming climate crisis that science has predicted and reinforced several times over, and the cup of woes is full. If there was a science based solution, we would have no cause to worry.
But to tackle the current global crises, we have to look beyond science and embrace economic and more importantly political solutions. As India hosts the presidency of G20 this year, it is being imagined that it could play a vital role in the revival.
India is the fifth largest economy in the world and growing faster than the ones above it, so that characterization is no longer absurd. It is another matter whether we are ready to do assume that mantle just yet. The Budget, being presented at a time when India has well and truly assumed the presidency of the G20, might have an answer. Will the FM begin to lower tariffs to make India more competitive and attractive for global value chain (GVC) participation or will the creeping protectionist tendency in certain sectors such as mobile phone components continue as in the recent budgets? As hosts, what better way, than to do what the great trade theorist, the late TN Srinivasan always supported, unilateral liberalisation, thereby demonstrating empirically we are open for business. We could then even bargain for better market access for our exports. That will be killing many birds. Lower export growth has been a drag on domestic growth due to the related multiplier effects. To shore up exports as global demand falls means making our exports more competitive. Import tariffs are nothing but an export tax and therefore should no longer be part of our policy set, barring exceptions.
This will perhaps be the last full budget before next year’s general elections. FY24 will also be the first post-COVID-19 normal year without any base effects characterizing GDP. While there might be a temptation to be populist (which is good at times), we expect the FM to continue on the hard path towards fiscal consolidation and not deviate from the 5.9% fiscal deficit target set out for FY24. This is a far cry from the aim of 3% envisaged under the Fiscal Responsibility and Budget Management (FRBM) Act and yet can be excused due to the crippling effect of the Covid-19 pandemic. At the same time there has now to be focus on investments in sustainable infrastructure, inclusive growth, job creation making for a tough, although not impossible, balancing act between fiscal consolidation and fiscal support to growth. Rationalizing subsidies is the way forward, one that the government has already begun to do.
India’s golden years of growth between 2004-08 were marked by massive doses of private investment, with total investment touching 38 % of GDP. Investment has since fallen to less than 30% and it has been its revival that both monetary and fiscal policy have been attempting to do, albeit in difficult circumstances. Monetary policy has focused more on inflation in recent times, while fiscal policy has provided the needed stimulus. How long can the government continue to prop capex? Reviving the decade long decline in private investment is also vital for productive job creation. There is hope in that corporate balance sheets have improved recently and credit growth has recovered. Supply side disruptions caused by the pandemic are also beginning to ease but the question that remains is, what will it take to get investment back to the levels we achieved during the golden years. For that we perhaps need to wait a bit longer. Meanwhile government needs to continue its spend on infrastructure, along with improving critically the soft infrastructure i.e. ease of doing business and all that goes with it! The government cannot afford to take its foot of that pedal. One success indicator for that will be an improved tax/GDP ratio that for the central government hovers around 11 percent or thereabouts. To get in the teens will mean reducing the compliance cost of paying taxes in India. A good start will be to seriously estimate what is costs to pay taxes and then begin to target its reduction. A broader tax net will be the inevitable outcome and more fiscal room the happy result for the government.
Rajat Kathuria is Dean, School of Humanities and Social Sciences at Shiv Nadar Institution of Eminence and Professor of Economics. The views expressed are personal.