As the government finalises an interim budget in the run up to the 2024 general elections, it looks as if the economy is firmly set on the road to recovery. Latest official data from the National Statistical Office (NSO) projects 7.3 percent growth for 2023-24, maintaining the pace set in the last fiscal. The tag of the fastest growing major economy will continue this year, making this country somewhat of an outlier in a world beset by geopolitical tensions and recessionary trends.
External Headwinds
Yet complacency needs to be avoided as external headwinds could well spoil the party in the next fiscal. In case the conflagration in West Asia widens, there could be ripple effects throughout the world. Ominous signals of Iran’s deepening involvement in the Israel-Hamas war are worrying as it could trigger a sharp reaction from western countries led by the U.S. This, in turn, would have global economic consequences in terms of higher oil prices and disruptions to global supply chains.
Hardening of oil prices would be a serious concern for India as it imports over 85 percent of its fuel requirements. The oil import bill has been contained to manageable levels largely due to the availability of Russian crude oil at discounted prices. In addition, world markets have been softening for the past two months owing to reduced demand and higher inventories. A reversal of this situation would lead to more expensive crude imports and widening of the current account deficit. It had expanded to 3.8 percent last year in the wake of the Ukraine war but has now been restrained to one per cent.
The fear of global supply chains disrupting yet again has also arisen with the Houthi rebels’ recent attacks on merchant vessels moving through the Red Sea. The situation could get exacerbated in case the West Asian war turns into a wider conflict. An immediate fallout for India would be on merchandise exports that have already slowed down in the current fiscal after reaching a record level of US$448 billion in 2022-23. The dip of 6.5 percent from April to November 2023, reflects lower demand in key markets of Europe and the US. In case geopolitical fissures widen, worldwide recessionary trends are bound to deepen and create more hurdles for exporters struggling to remain competitive.
Budget And Policy Prescriptions
It is in this backdrop that Finance Minister Nirmala Sitharaman has to formulate an interim budget, which will be operative only till the new government assumes power after elections in mid-2024. With latest polls indicating yet another term for the incumbent NDA, she could well take a more long term policy perspective. Yet it takes no crystal ball to know she is likely to follow the past prescription of heavy infrastructure investment, a policy that has paid rich dividends by giving a push to growth.
A significant lacuna in the recovery process, however, has been the lag in terms of private investment which has yet to catch up with the capex drive by centre and states. This is despite the slew of initiatives launched to lure investors including a spate of production-linked schemes (PLI) in a wide range of sectors. It is on the ease of doing business, however, that more work needs to be done. India is still viewed as a country where it is difficult to do business in contrast to more investment-friendly destinations like Indonesia and Vietnam.
Slow rise in consumption remains another weak area. According to the NSO data, consumption growth is at 4.4 percent, the lowest in the past two decades.
As for the fiscal deficit target of 5.9 percent for 2023-24, one can be optimistic judging by robust revenue collections while dividend receipts are also set to be buoyant. Disinvestment inflows are not likely to meet the target yet again but will not make a difference in the ultimate outcome. Going by the latest NSO data, however, the fiscal deficit could be slightly higher than expected as nominal GDP growth is now set to expand by a slower 8.9 percent rather than 10.5 percent estimated in the budget. The deficit thus comes to about six percent of this nominal GDP estimate, marginally higher than the target.
The budget is considered by many to be a political document about the economy. With general elections looming later in the year, it is likely to be an occasion to underline the success achieved in bringing about an economic recovery after the strains of the pandemic and geopolitical tensions. It would be prudent for the Finance Minister to avoid resting on these laurels and instead accelerate policies that will not only push growth further but continue to protect the economy from global headwinds.
Sushma Ramachandran is a senior journalist based in Delhi. Views are personal, and do not represent the stand of this publication.
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