Survey links growth to ongoing reforms

While services exports may continue to have a competitive advantage, future growth will hinge on domestic consumption and investment demand

The Economic Survey 2023-24 profiles past economic performance, linking it to policy reforms and global conditions. It outlines India’s potential to grow in the medium to long term. 

Growth prospects

While India’s economic performance was beset by Covid in 2020-21, it has shown the healthiest recovery among major global economies since then, witnessing an average growth of 8.3 per cent during 2021-22 to 2023-24. India may aim for a long-term growth of 7 per cent-plus. Achieving this would require sustaining a real investment rate of 35 per cent, assuming an incremental capital-to-output ratio (ICOR) of 5. With a net inflow of capital of about 2 per cent of gross domestic product (GDP), which may be considered sustainable, real domestic saving rate needs to be about 33 per cent. This appears feasible since in 2023-24, the real and nominal saving rates are estimated at 35.5 per cent and 32.7 per cent. For the Union Budget, it is the nominal GDP growth that is critical since tax revenue growth is dependent on it. Given the Survey’s average real growth of 6.75 per cent (6.5 per cent to 7 per cent) for 2024-25, it is likely that the underlying nominal growth for the Union Budget for 2024-25 may be 10.5 per cent, implying an implicit price deflator (IPD)-based inflation of 3.5 per cent.

In the context of inflation management, the Survey calls for a review of the present inflation targeting regime, broadly arguing in favour of recasting the target to focus on non-food consumer price index (CPI) inflation. Since recent pressure on CPI inflation was largely driven by food inflation, this modification in inflation management might facilitate the easing of interest rates and thereby make monetary policy more growth-oriented.

Fiscal consolidation

Assuming a buoyancy of 1.1 for the Government of India’s (GoI’s) gross tax revenues (GTR), along with a nominal growth of 10.5 per cent, the expected tax revenues would amount to Rs 38.7 trillion in 2024-25, and a net tax revenue to the GoI of Rs 26.3 trillion. This would facilitate the task of fiscal consolidation for the next Budget as well as for the medium term. The fiscal deficit-to-GDP ratio may be brought down to close to 5 per cent in 2024-25, and in four equal increments of 50 basis points each, it may be brought down to 3 per cent by 2028-29. It should then be maintained at this level in the long term, supplemented by a similar magnitude of fiscal deficit for the state governments. In fact, the Survey highlights that the fiscal deficit-to-GDP ratio for states has remained below 3 per cent during the last three years, from 2021-22 to 2023-24. The Survey highlights the increasing investment orientation of the fiscal deficit, implying a progressive reduction in the share of revenue deficit within the fiscal deficit. If and when the revenue deficit is eliminated, the entire 6 per cent of the fiscal deficit relative to GDP would add to the combined government’s contribution to capital formation, which would mostly be devoted to infrastructure expansion. The Survey emphasises the role of infrastructure, both physical and digital, in sustaining India’s growth momentum. The Survey calls for an increasing role of the private sector in building infrastructure, alongside the central and state governments.

Demographic challenges and employment

A critical challenge for policymakers focusing on the long term is to deliver an employment-intensive growth that can cater not only to the new entrants to the workforce, but also absorb the existing stock of unemployed individuals that has been growing in recent years. The Survey points to a decline in the unemployment rate from 6 per cent in 2017-18 to 3.2 per cent in 2022-23. Going forward, emphasis has to be placed on skill building. The Survey indicates that only 4.4 per cent of the young workforce is formally skilled. There is a need to accelerate skill building and technological upgrade of India’s workforce. The impact of artificial intelligence (AI) would be both productivity-enhancing and labour-saving. The Survey advocates policy support to those sectors that can strike a balance between deploying technology and labour.

The Survey recognises the role of the strategy for financial inclusion, which has been a target-based approach facilitating the direct delivery of benefit transfers through digital payments. A vast digital infrastructure has already been put in place for financial inclusion and expansion in the country, which will come in handy in supporting welfare and employment-oriented long-term growth.

India’s path towards long-term growth

The Survey highlights the direction the Indian economy should take while building its long-term future. This path should be characterised by six desirable features: (1) an emphasis on employment-oriented private sector investment, (2) a focus on the greening of growth, (3) supporting the growth of  micro, small and medium enterprises, especially through improved access to credit, enhanced physical and digital connectivity, and a better regulatory environment, (4) continuing to rely on agricultural growth supported by better technology and climate-friendly policies, (5) a continued emphasis on education and skill building, and (6) increased productivity of the state governments.

The Survey points out that as of May 21, 2024, the share of non-fossil sources in the installed electricity generation capacity has reached 45.4 per cent. Further, the country has reduced the emission intensity of its GDP by 33 per cent from 2005 levels as of 2019. The Survey highlights that energy needs in India are expected to grow 2-2.5 times by 2047. It advocates an energy transition that should factor in alternative demands on the resources for improving resilience to climate change and for sustained social and economic development.

India’s medium- to long-term growth, according to the Survey, will be facilitated by keeping the general government debt within sustainable limits, which, under the Fiscal Responsibility and Budget Management Act, is specified at 60 per cent of GDP. This calls for a steady reduction in government debt to sustainable levels. Global economic conditions will not be conducive to an export-based growth strategy. India’s future growth will be a unique experience in itself, largely based on domestic consumption and investment demand. However, going forward, India’s services exports are expected to continue having a competitive advantage.

The writer is chief policy advisor, EY India, and member, advisory council to the Sixteenth Finance Commission. The views expressed are personal