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09 JAN,2023 | MEDC
With most of its macroeconomic fundamentals in place, India has weathered the global headwinds relatively well. Its fiscal and current account deficits are not too comfortable, but its huge reserve holding and well-calibrated exchange policy have enabled it to manage large financial outflows. In the current financial year, India should see GDP growth of over 6.5%, which is better than many comparable economies. Thanks to enlightened RBI policies, inflation expectations are also anchored. With a third of the world headed for a recession, and China suffering due to its self-inflicted Covid policies, this is India’s chance to emerge as a bright spot in the global economy. The Union Budget is being presented against this backdrop, and policymakers should ensure that we continue to exploit all available advantages better than our economic competitors.
Many of the past year's uncertainties and risks continue, and more could well be lurking around the corner. In our neighborhood, the continuing disturbances in Iran and an increasingly belligerent China could add to our domestic risks. India's GDP growth is projected at 6.5%, which many feel is optimistic. But even at this rate, it will take India a decade for the benefits of economic growth to percolate thoroughly to the bottom of the pyramid. It is doubtful if we have the luxury of that much time, especially when our youthful population is becoming increasingly aspirational. Boosting the GDP growth rate (even at the cost of some inflation) is not optional.
Fiscal consolidation has to remain a cornerstone of the budget. A lack of fiscal consolidation will have an adverse effect on our current account deficit and complicate the attainment of macroeconomic stabilization. In this regard, a revival in investment – both public and (especially) private sector – is the key. Over the past decade, India's per capita GDP has not even doubled as private investment slackened. Budgetary policy needs to bring about a revival of private investment if GDP growth is to exceed 7%. Enhancing ease of doing business and reducing transaction costs will go a long way in this regard, as it will improveinvestor confidence in the economy.
Given today's geopolitical realities, many global firms are looking to move out of China. But their move towards India cannot be taken for granted. Policymakers will have to put in that extra effort to project India as a highly attractive investment destination, and possibly, a global alternative to China. Apart from higher allocations to public capex, fixing the regulatory landscape and addressing procedural delays in investment projects will prove helpful. In particular, India needs to attract climate-friendly investment to make genuine progress on its environmental goals. To this end, further GST reforms, and a visible commitment to liberalization and privatization will go a long way.
Lastly, India's annual budget continues to remain a powerful market force. India is one of the few big economies today in which the government's annual budgetary plans drives large movements in the stockmarket. There is, strictly speaking, no direct connection between a booming stockmarket and a growing economy. But a booming stockmarket does ignite the feel good factor, which helps createanimal spiritsamongst entrepreneurs in the economy. The challenge is to sustain it. That needs to be kept in mind, when preparing the budget in this age of uncertainty.
*Picture Credit - Google
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