The Budget as a new credibility asset

The Budget reflects a solid continuity and even reinforcement of the development orientations and objectives pursued by the PM over quite a few years now


Claude Smadja
A key question about the Budget presented by Finance Minister Nirmala Sitharaman is whether it will consolidate the perception building among the international business community that the country can now legitimately assert its positioning as a key investment destination, a reliable global supply chain hub, a logical option for multinational companies as they try to diversify their sourcing and reduce dependency on China. Looking at the Budget 2023-24, and the vision of economic development that it translates, the answer to this question can be defined as cautiously positive. And this for a number of good reasons.
First, the new Budget reflects a solid continuity and even reinforcement of the development orientations and objectives pursued by the Prime Minister over quite a few years now, and a clear “coming out of the woods” from the disruptions which had been created by the pandemic.

Two, the measures announced should help create a self-sustaining synergy between the pursuit of growth through effective, future-looking and technology-oriented infrastructure investment, the need to prioritise social and economic inclusion, especially towards the rural areas and the MSMEs, much more than has been the case in the past, and the other priority of ensuring an energy transition as more urgent than ever imperative.

Three, the supporting measures included in the Budget are targeting the right priorities with the 33 per cent increase in capital spending directed almost exclusively towards infrastructure development with a focus not only on crucial infrastructure elements such as railways (the highest budget increase ever) roads, ports and airports but, as crucially, on fulfilling the Digital India strategic objective of the government, on start-up support through complementary ways.

Four, a gross domestic product growth (GDP) of 6-6.5 per cent for 2023 — making India the fastest growing economy among the world’s top 10 — seems quite achievable while the reduction of fiscal deficit to GDP from 6.4 per cent last year to 5.9 per cent this year looks also well beyond reach, helped among other things by the low price of oil bought from Russia. This creates the kind of stable and predictable macroeconomic environment so important as a factor for long-term investment decisions.

There are, however, some reasons why the answer to the question about this Budget helping to consolidate India’s positioning as a key investment destination, as a reliable global supply chain hub and partner, has to be cautiously positive.

The first reason is that everything will rest on execution. In that respect one has to admit that execution is not necessarily the strongest point of India public governance. Many targets set in previous budgets have been achieved partially — or very partially — in domains such as GDP growth, national highways, housing-for-all scheme, fiscal deficit, etc. So, execution discipline and close monitoring will be more important than ever to protect the credibility of the government towards investors.

The risk of complacency linked to being branded as the fastest growing economy is always lurching and India succumbed to it previously when it was also labelled as the fastest growing economy. Above all, what India needs to fulfil its ambitions as a new global economic power is sustainable 9 per cent annual growth rather than 6 or 7 per cent. China’s GDP is still 2.6x higher than India’s in PPP terms — and more than five times higher in nominal dollar terms.

The second reason lies with the fact that, despite huge progress in recent years, a lot remains to be done in terms of bureaucratic and legislative reforms to continue to improve the ease of doing business and to attract more foreign investment.

The third reason is that India’s manufacturing share of GDP is only 15 per cent, and the manufacturing base of the country remains too narrow despite many years of Make in India programme, to be the global sourcing base that could compete with China. Having cancelled all its Covid restrictions China is now advertising itself as being again fully open for business.

Of course, the US-China geopolitical and technology confrontation, European suspicions and Covid lockdowns have quite dented the attractiveness of China as the ultimate sourcing base. But there is no underestimating China’s potential. And the fact that the country remains the Number One trading partner of more countries in the world than the US and Europe combined.

Last but not least, the risk of a recession in Europe and to a lesser extent in the US remains very strong, or at least of a so pronounced slowdown that it would not make much difference with outright recession. This would have an impact — hopefully limited — on India’s prospects.

So, three cheers for a good Budget. But — more than ever — discipline and rigor of execution, caution and fast adaptation to the global environment will be more crucial than ever.

The author is the chairman of Smadja & Smadja Strategic Advisory, Switzerland

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

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First Published: Feb 01 2023 | 9:16 PM IST

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