Global growth is expected to slow sharply in 2023 and as per an assessment, adjusted for base effects, growth will likely be as weak as it was in 2009 after the financial crisis, as the conflict in Ukraine risks becoming a “forever war”. A dire global growth outlook and slowing growth will also bring about some moderation in the domestic economy, especially the consumption engine where the recovery has remained pronouncedly K-shaped for some time now.
It is only understandable then that demands have been made by various stakeholders in the economy during the pre-budget exercise for measures on stimulating consumption, which accounts for about 60 percent of the nominal GDP. Even though private consumption was about 9.9 percent above the pre-pandemic level in the first quarter of the financial year 2022-23 (Q1 FY23), a huge divergence exists in the ongoing consumption recovery. According to a recent report by Nielsen IQ, while urban markets' volume grew 1.2 percent in Q2 FY23, rural markets recorded a steeper decline in the volume of fast-moving consumer goods (FMCG) sales at 3.6 percent compared with a fall of 2.4 percent in Q1 FY23. The fall in sales volume is also evident in the supply-side analysis of the industrial production data, whereby consumer non-durables have declined for the past three consecutive months.
So, what can be done?
1) Fiscal restraint to lower inflation & support real incomes: The central and state governments should continue to prioritise helping the most vulnerable to cope with sticker price shocks and higher inflation in general. But they should be watchful not to add to aggregate demand that risks stoking inflation.
One way, to support consumption, could be to exercise fiscal restraint, i.e., stick to its budgeted fiscal deficit targets and remain steadfast to the medium-term fiscal consolidation path. While this sounds counterintuitive, fiscal restraint can lower inflation while reducing debt since a larger fiscal deficit raises inflationary pressures via increased demand for goods and services. A lower deficit, on the other hand, cools aggregate demand and inflation and lowers the pressure on the Reserve Bank of India (RBI) to tighten. A fiscal stimulus in the current high inflation environment would force the RBI to slam on the brakes harder to curb inflation. Amid elevated public and private sector debt, this may raise risks for the financial system as well as the overall recovery. In fact, fiscal discipline may enhance India's financial stability standing, help attract foreign inflows and stabilise the rupee.
2) Provide ‘relief’ not stimulus: During periods of slower growth and especially in the backdrop of post-pandemic recovery and raging war in Ukraine, it is an important policy imperative to reduce the hardship and long-lasting damage. Even with high inflation, getting relief to the needy is necessary by expanding financial and social inclusion, and by building a more inclusive economy from the bottom up. However, one must be mindful of the balance between relief and stimulus. It is indeed possible to do it without undermining current efforts to lower inflation. The government should focus on supporting and providing relief to the bottom of the pyramid and an extension of the ongoing welfare schemes should not be ruled out completely. The move to provide support via lowering of duties on oilseeds, cuts in pump prices when global prices skyrocketed, providing free food to the needy or raising the fertiliser subsidy are examples of such policies.
Committing to programme duration based on economic conditions would reassure economic agents the duration of support must be conditional and not become a never-ending scheme. Binding programmes to economic conditions would make them more effective.
3) Focus on enhancing the denominator i.e., growth via public capex: The focus on growth holds merit, as all major forecasters have pared India's growth projections for 2023 and 2024. The government must focus on returning growth momentum to the economy through broad-based support to capex and continuing reforms, especially on the logistics front.
Doubling down on public capex, which has higher multipliers as compared to consumption, can help spur growth, jobs and incomes that will be supportive of broader consumption. Moreover, capex has an inherent advantage in terms of being distributed across the country geographically via projects and can help also create local jobs.
4) Avoid policy shocks: The government should see through the white noise of competing agendas and avoid unwarranted tinkering, or any knee-jerk changes to taxation or sectoral policies. Abrupt changes in policies especially taxation at this juncture can prove counterproductive and affect the Centre’s ability to fund capex expenditures.
The recent experience of the unfunded tax cuts by the UK's erstwhile Truss administration shows how completely unforgiving markets can be when it comes to reckless policy experiments and lack of fiscal discipline amid a high-interest rate backdrop and extremely uncertain environment.
Sachchidanand Shukla is the group chief economist of Mahindra & Mahindra. Views are personal and do not represent the stand of this publication.
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