The good news
that India’s GDP grew at 6.1 percent in Q4 (January to March 2023) and at 7.1 percent over the entire fiscal year (2022-23) received less than deserved attention. The previous fiscal year (2021-22) was the first post-COVID normal year. To clock a growth rate of 7.1 percent over a normal base year sends hopeful signals. Secondly, it reversed the sorry trend, visible since 2018-19 of growth slumping in the last quarter, portending bad news for the succeeding year. This jinx was broken with growth in Q4 higher than in any of the preceding six fiscal years and nearly equal to the growth in Q2 of that year (Refer to Table 1)
Table 1: Charting India’s GDP growth
Explaining the sudden reversal of fortunes in 2022-23 is harder. One explanation could be that oil import prices moderated in Q4. The average price from January to March 2023 was 17 percent lower than over the same months the previous year. India’s GDP is highly susceptible to the price of imported oil. A 17-percent reduction in oil price would have pushed growth higher.
Far from being fortuitous, this is a tribute to the pragmatic diplomatic stance evolved by India. It continued to import crude from Russia at a lower price than the prevailing market rates, which were pushed higher by the Western sanctions on Russia and the Ukraine crisis-linked supply disruptions. Thereby, India de-hyphenated its core economic interest from a global commitment to support multilateral action to restore peace in Ukraine.
Public investment-led growth
Private consumption—a driver for GDP growth—remains lukewarm. But fixed capital formation (investment), another driver for growth has been revived, albeit mostly on the back of enhanced public sector capital spending. This strategy is intended to evoke investor confidence and to de-risk private investments in the economy. Table 2 charts the revival in capital investments from a low of 26.9 percent of GDP in 2019-20 just prior to the COVID-19 crisis, to a high of 29.2 percent of GDP in 2022-23.
Table 2: India’s expenditure components of GDP
Fiscal constraints like the ceiling for public debt and the fiscal deficit norm under the Fiscal Responsibility and Budget Management Act 2003, limit how much government can invest in the economy. Nevertheless, it pulled out all the stops during the COVID-19 period. The fiscal deficit (FD) peaked at 9.2 percent of GDP in fiscal 2020-21. It remains high at 5.9 percent of GDP in 2023-24 (current fiscal).
The government, possibly, recognising the need for extended fiscal support, has pushed back a return to fiscal rectitude till after 2025-26 when the FD is targeted at around 4.5 percent of GDP versus the norm of 4 percent. This could be worrisome. Sustaining GDP growth above 7 percent depends critically on how soon private investment revives. Extended fiscal deficit-driven growth hollows out the resilience of the economy to shocks by reducing the capacity for counter-cyclical public funding to beat an economic downturn.
Exports are the second driver of higher GDP growth over 2022-23. The share of exports in GDP of 22.8 percent is the highest in the last six years. This is a welcome reversal of fortunes since export pessimism comes all too readily to the Indian policy establishment. That being said, the global downturn and increasing geopolitical uncertainty present a tough canvass on which to chart export-led growth. Export performance targets linked to incentive payments in the Production Linked Incentive (PLI) schemes for 13 industrial sectors, aim to compensate for an adverse global economic environment. Export targets also make cash incentives for global titans willing to establish global supply chains to India, politically kosher.
Export performance targets linked to incentive payments in the Production Linked Incentive (PLI) schemes for 13 industrial sectors, aim to compensate for an adverse global economic environment.
Much, however, depends on the quality of projects selected for this incentive. A related issue is the potential surge in imports of supply inputs at higher prices if Chinese imports are to be blocked strategically. The share of imports in GDP of 26.4 percent in 2022-23 was significantly higher than in the previous year at 24.2 percent, growing at 9 percent over the previous year versus an increase in exports share in GDP of just 6 percent. We have to watch how net exports grow via the PLI schemes. Rushing to conclusions on initial data might be misleading.
Second rung indigenisation
Domestic supply of inputs to friend-shored global brands should be a focus area if the essence of atmanirbhar
manufacturing is to be realised. Instead of going it alone for inputs manufacture, global collaborations, including in third countries, can add value and depth to the domestic ecosystem.
Developing national manufacturing capacity is never cheap. This was the experience from four decades of public sector industrialisation after independence. At the time, the emphasis was on core investments in infrastructure and metals. Today, adding a layer of private ancillary suppliers to co-located global manufacturers is an even more foundational task. A revival in the availability of skilled jobs, for which human resources already exist, could be a welcome outcome.
Boosting domestic demand
Private consumption remains lukewarm despite expensive income support programmes—at 60.6 percent of GDP versus 59 percent in 2017-18, in the aftermath of the demonetisation-driven readjustment of the economy. A more sustainable way of spurring consumption and investment is to dial down the policy interest rates once inflation becomes containable within the normative 4 percent.
Domestic supply of inputs to friend-shored global brands should be a focus area if the essence of atmanirbhar manufacturing is to be realised.
Inflation is down but well above the norm
The reduction in consumer inflation from 5.66 percent in March to 4.7 percent in April 2023
is driven by a significant reduction in food price inflation from 5.11 percent in March to 4.2
percent in April. Prices of vegetable oils and fats, meats and vegetables have reduced steeply. But inflation in cereals, milk, and milk products remains high. Fuel inflation has also reduced from 8.91 in March to 5.52 percent
in April, but core inflation remains elevated.
A cap on tax revenue as a share of GDP
A second option is to cut back on tax rates recognising that pancaked tax rates and inflation-unadjusted income tax rates penalise the honest taxpayer. Reducing tax rates risks limiting the ballooning revenue from tax receipts—a resource which the government has used to boost investment and contain the fiscal deficit and debt levels. With national elections around the corner, reducing tax rates could be a suitable recognition of the nation-building efforts of honest, individual taxpayers. Transparently capping the amount that government considers a fair tax share of GDP also imposes a hard budget constraint on the government. This could temper expansive outlays, unrelated to fiscal priorities.
The burden of financing increasing levels of ill-defined, inefficient “social protection measures” and subsidies for inefficient public sector service providers, cannot be borne entirely by the 80 million private income tax taxpayers. It is these taxpayers that also generate the bulk of consumption demand, which is the only sustainable way to revive industrial investment and jobs. Far better to leave money in their pockets rather than to tax and then redistribute.
Transparently capping the amount that government considers a fair tax share of GDP also imposes a hard budget constraint on the government.
More broadly, the government needs to reorient skills towards regulating markets rather than micromanaging investments or the direct provisioning of public services. Presently, it is overburdened with peripheral concerns beyond its core mandate. Sticking closely to areas of market failure for government intervention can downsize outlays. It can also focus the leadership on the primary tasks and provide strategic distance from subsidiary areas, best managed at lower levels of government or by lightly regulated private markets or community partnerships. Dialling down the tax and public debt-driven, active industrial policy model could greenlight private demand-led consumption and private investment-led growth.
Sanjeev Ahluwalia is an Advisor at the Observer Research Foundation.
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