Building blocks

Next govt must build on macro strengths

The next Union government, which will assume office later this month, will find itself in an extremely comfortable position on the economic front. The data released by the National Statistical Office last week showed the Indian economy exceeded expectations and recorded a gross domestic product (GDP) growth rate of 8.2 per cent in 2023-24, compared to 7 per cent in the previous year. This also meant the economy expanded by 7 per cent or more for three consecutive financial years. Forecasts, including by the Reserve Bank of India (RBI), suggest growth in the current year would also be around 7 per cent. Notably, the economy is growing at a healthy rate even as the government is moving forward with fiscal consolidation. The government finance data, also released last week, showed with better tax collection, the fiscal deficit for 2023-24 came at 5.6 per cent of GDP, compared to the Interim Budget’s revised estimate of 5.8 per cent.
 

Besides growth and fiscal position, the next government would also draw comfort from the fact that inflation outcomes are improving, though the headline rate is still above the RBI’s target. Further, bank and corporate balance sheets are in a good position. India’s foreign-exchange reserves are also at comfortable levels, providing stability on the external front. The policy efforts to strengthen macroeconomic stability over the past several years have paid off, and the situation is significantly different from 10 years ago, when the incumbent government took office. India had narrowly avoided a balance of payments crisis a few months earlier, and the Indian economy was dealing with multiple pressure points.

Although there are some quibbles about the GDP deflator and the difference between real and nominal growth, the overall economic strength is well acknowledged. The economy grew 9.6 per cent in nominal terms, compared to 14.2 per cent in the previous year. Nevertheless, it is also critical to acknowledge that post-pandemic economic recovery has been largely driven by higher government expenditure, which will need to be contained as the government moves further with fiscal consolidation. Attaining the fiscal-deficit target this financial year, however, will not be difficult, given the RBI’s higher than expected surplus transfer. Therefore, with the given comfortable position, the new government would be well advised to present a revised glide path for fiscal consolidation to reduce the fiscal deficit to 3 per cent of GDP or lower in the July Budget. This would boost market confidence and help revive private investment.
 

Private-investment revival will, in fact, be the most important factor driving growth over the medium term and should be the key focus for the next government. As the government consolidates its finances, the private sector will need to fill the investment gap to sustain higher growth. However, weak domestic private consumption could constrain private investment, particularly when external demand is also expected to remain relatively subdued. One of the big economic policy challenges for the next government will be to improve India’s external competitiveness. This will require review and policy changes at multiple levels, including trade policy. Higher sustained export growth can help push investment, create much-needed jobs, and improve overall quality of growth. In this regard, India can benefit from geopolitical changes and become a major part of the China-plus-one shift. Overall, while the next government will perhaps get the best economic starting point ever, the challenge will be to build on it to achieve rapid and balanced economic development.