Editorial 1: A Budget that drives growth with stability
Introduction
The new government will present the final budget for 2024-25 on July 23. It provides government with the opportunity to spell out its policy priorities regarding growth and employment.
- With continued global economic shutdown, India will have to rely on domestic growth drivers.
- Short term objective could be to ensure a minimum 7% growth and medium-term objective could be to sustain real GDP growth rate in between 7-7.5%.
- Bringing down the fiscal deficit relative to GDP from the current levels to FRBM consistent level of 3% in next 3-4 years.
- On employment front additional emphasis is to be given on relatively more labour-intensive sectors.
Investment and Savings prospects
- To ensure 7% plus growth on a sustained basis, a real investment rate of 35% is required.
- The real investment rate measured as gross fixed capital formation (GFCF) as percentage of GDP was 33.3 for FY23 and 33.5 for FY24.
- In FY23 the saving to GDP ratio in nominal and real terms were 30.2% and 32.8% respectively.
- If these trends continue then, marginal upward adjustments are required in savings and investment rates to reach the level of 35% of GDP for GFCF.
- The recent fall in household sector financial savings is a cause of concern. It is critical to increase the household financial savings rate to facilitate access to investible surplus at reasonable rates for the private sector because the sector provides investible surplus and inflow of foreign capital.
- Due to subdued export prospects the contribution of net exports to GDP growth has remained low – 0.5% points in FY23 and (-)2.0% points in FY24.
- Until export demand picks up and private investment gathers momentum, India will have to rely on government investment demand to provide support to growth.
Budgetary Options
- Government’s revenue position is expected to improve on account of both higher tax and non-tax revenues.
- A nominal GDP growth for 2024-25 is expected to be 11%, made up of 7% real growth and 3.8% implicit price deflator (IPD) based inflation.
- The rise in IPD based inflation is on account of expected higher Wholesale Price Index (WPI) inflation.
- Tax Revenues: With buoyancy of 1.1 and gross tax revenues (GTR) growth of 12.1%, the GTR is expected to be Rs. 38.8 lakh crore. It will lead to a net tax revenue for the centre at Rs. 26.4 lakh crore after giving the States’ share in central taxes.
- Non-tax Revenues: RBI’s augmented dividends of Rs.2.11 lakh crore will ensure high non-tax revenues. Such a transfer from RBI to government will be expansionary because of liquidity effect and will have implications on monetary policy. But the improved revenue situation of the central government would facilitate meeting the fiscal consolidation target.
- The increased growth will enable the government to accommodate higher revenue expenditures on account of increased subsidies, health expenditures and allocations for MGNREGA to support and provide relief to rural population.
Conclusion – Commit to FRBM targets
The budget needs to combine growth with stability. Stability includes both price stability and fiscal stability. Committing and sticking to FRBM targets will lead to reduction in debt GDP ratio and interest payments to revenue receipts. This will facilitate reduction in fiscal deficit, thereby creating a virtuous cycle.
Editorial 2 : The shape of manufacturing 3.0 for Modi 3.0
Introduction
As the new government enters office, it must double down on its efforts related to economic reforms, particularly related to manufacturing.
- India’s continued urbanisation will see hundreds of millions of agriculture workers relocate to cities to find formal employment in the coming decades. A failure to generate low-skilled employment could push staggering stress on India’s governance structures.
- Success in manufacturing will help India to achieve domestic trade and employment goals. It will also expand resources for national security.
Manufacturing Base Must Improve
- In 2014, the government committed to increase manufacturing as a percent of gross domestic product (GDP) from 15% up to 25% by 2025. But World Bank data indicates, manufacturing is in relative decline, making up only 13% of the GDP in 2022. This compares unfavourably to markets such as China (28%), Vietnam (25%), Bangladesh (22%), Malaysia (23%), Indonesia (18%), Mexico (21%).
- India has powerful domestic compulsions to improve its manufacturing base.
- India has a massive employment-creation requirement. About half of Indian labour remains mired in low-productivity agriculture.
- High goods trade deficit. In last 12 months India had a goods trade deficit of $250 billion and a surplus of $160 billion in services trade. But even though the services sector creates substantial economic output, it employs relatively few workers.
- Reasons for US stake in India’s success in building a robust manufacturing base:
- Improvements in India’s industrial base will have direct and indirect effects on India’s ability to underwrite its emerging role in regional security which is increasingly important given China’s rising aggression.
- Some amount of manufacturing will not come back onshore. Having this manufacturing based in friendly countries improves the viability of U.S. supply chains.
States and their Business Environments
- Most factors of production such as electric power, water, sanitation, labour regulations, land acquisition rules, and environment regulations are primarily controlled by India’s State governments. Therefore, states need a much higher degree of policy attention for India to achieve greater success in manufacturing.
- Centre government’s early attempts to stoke States into competition with each other have fallen by the wayside and its plan to help craft model industry laws for States to consider has been underwhelming.
- Getting more States to focus on thoughtful, transparent industrial policies is a difficult task and will require an improved toolkit of sticks and carrots.
- Government should consider putting stronger emphasis on job-creating manufacturing sectors such as textiles, paper mills, and furniture, instead of pushing almost exclusively for investments in capital-intensive sectors such as semiconductors and robotics.
Go beyond Delhi-Mumbai-Bengaluru Circuit
- The U.S. can play a modest but meaningful role in improving the business attractiveness of Indian States.
- Expanding engagement with Indian States to provide direct guidance on effective economic governance and improve pathways for potential investors to engage with State governments.
- Senior U.S. officials visiting India must commit to going beyond Delhi-Mumbai-Bengaluru and engaging a wider set of large States on the importance and opportunity from the current evolution of global supply chains.
Conclusion
The general election in 2024 provided an opportunity to assess and redirect policy. But India’s core needs behind the current manufacturing push — jobs, trade, and security — will not change. The size of the market and current growth rates are quite attractive to investors. But more work needs to be done, especially at the State level in India, for “Make in India” to further accelerate.
