MUMBAI :Domestically, the backdrop is that of an impending general election, and, traditionally, an incumbent government cannot present a full Union budget in such a year. Whereas, globally, the setting is that of a debate on debt and sustainability amid falling growth. But that shouldn’t necessarily be the context for the upcoming budget. A myopic focus a la the developed economies or the rest of the world on just debt reduction could prove to be costly in the long term as the India story literally has miles to go. Likewise, an interim budget presented by the government before the general elections should not constrain its ambition to do what is right for an economy that is poised at a critical juncture.
Domestically, the backdrop is that of an impending general election, and, traditionally, an incumbent government cannot present a full Union budget in such a year. Whereas, globally, the setting is that of a debate on debt and sustainability amid falling growth. But that shouldn’t necessarily be the context for the upcoming budget. A myopic focus a la the developed economies or the rest of the world on just debt reduction could prove to be costly in the long term as the India story literally has miles to go. Likewise, an interim budget presented by the government before the general elections should not constrain its ambition to do what is right for an economy that is poised at a critical juncture.
The government must focus on nurturing and furthering India’s human and physical capital, and invest in areas that can enhance its potential growth and usher it towards the goals of India’s Amrit Kaal. The budget must provide a blueprint for steering the economy towards a sustained high-growth trajectory in a growth-starved world. This will ensure that our debt-to-gross domestic product (GDP) ratio will decline once the economy is on a higher growth path. Note, the global economy is forecast to slow even more in 2024 to approximately 2.6%. Moreover, the expectation is that conditions will weaken over the year ahead due to high interest rates, geopolitical tensions and a slowdown in the world’s top economies.
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The government must focus on nurturing and furthering India’s human and physical capital, and invest in areas that can enhance its potential growth and usher it towards the goals of India’s Amrit Kaal. The budget must provide a blueprint for steering the economy towards a sustained high-growth trajectory in a growth-starved world. This will ensure that our debt-to-gross domestic product (GDP) ratio will decline once the economy is on a higher growth path. Note, the global economy is forecast to slow even more in 2024 to approximately 2.6%. Moreover, the expectation is that conditions will weaken over the year ahead due to high interest rates, geopolitical tensions and a slowdown in the world’s top economies.
So, what should the interim budget focus on?
Adherence to fiscal targets and fiscal consolidation road map: The targeted fiscal deficit for 2023-24 is 5.9%, which is a 50-basis-point reduction from 2022-23 levels. Adhering to these targets will reassure sovereign rating agencies and investors. It will also keep a lid on yields and borrowing costs that have been rising the world over.
Furthermore, it is important to re-emphasize a medium-term fiscal consolidation road map with a clear elucidation of the fiscal journey ahead. The finance minister has in the past reaffirmed the desire to bring fiscal deficit under 4.5% by 2025-26. However, an important question that follows is—should such consolidation be at the cost of spending? India’s fiscal consolidation has, more often than not, been on the back of expenditure cuts. The budget must reflect a concerted effort to reinvigorate the Keynesian “animal spirit” and enhance long-term growth potential.
Quantity and Quality of spending: The quantum of the government spending is now significant in size. For e.g., in 2023-24, the overall budgeted government expenditure stands at ₹45 trillion. The size of spending corresponds to the size of India’s real GDP back in 2002. Thus, the improvement in the efficiency and effectiveness of public spending is a non-negotiable. The capital budget and the framework should be in order to meet national development needs in a cost-effective and coherent manner. Efforts should be made to raise revenues structurally to be able to invest for future growth and sustaining high growth rates. Thus, spending more, especially on capital outlay, is as important as fiscal consolidation through higher revenues.
Maintain the investment tempo: Reiterating the need for capex boost and doubling down on such spending will be an important signal that will have positive externalities, lower the logistics costs in the economy and make India globally competitive and spur exports. The government has done a commendable job in raising capex from 1.7% in 2019-20 to 3.3% in 2023-24, the highest since 2007-08. This has had a salutary impact on the economy and job market via the capital goods and infrastructure ecosystem.
Thus, increasing capital spending by at least 25% to ₹12.5 trillion in 2024-25 could reaffirm these signals and help crowd in private capex that has been lagging. Sustaining the rhythm in defence capex spending will be vital given India’s volatile neighbourhood and the current geopolitical backdrop. Indian manufacturing is in the middle of a multi-year revival after a “lost decade” ending in 2020. Promoting green hydrogen by expanding the definition of infrastructure sector to include various facets of the green hydrogen/ammonia ecosystem should also be looked at in view of the “global boiling”. Ease of doing business and reinforcing attempts to minimize the regulatory and compliance burden imposed on the taxpayers and stakeholders in the economy and facilitating the growth of micro, small and medium enterprises must also stay high on priority.
Lastly, the budget should be non-negative with no shock to the system, as the entry into global bond indices has put the spotlight squarely on government finances and fiscal responsibility. The fiscal math and assumptions therefore must be credible. Volatility in foreign funds for funding domestic needs in the current global macroeconomic backdrop entails significant risks and costs as was seen during the global financial crisis and taper tantrum episodes.
Sachchidanand Shukla is group chief economist at Larsen and Toubro Ltd. Views are personal.