Growth, Budget and macro balances

The responsible revenue and expenditure projections are to be lauded, but efforts on trade and fiscal targets fall short

On February 1, a leading business daily headlined its main front page story “Economic Survey sees FY24 GDP growth slowing to 6.5 per cent”. It was not strictly inaccurate, since the January 6 first advance estimates by the National Statistical Office (NSO) had projected 7 per cent growth for FY23. Nor would it be surprising given the near-recessionary conditions expected in much of the world in FY24.

However, a more careful examination of the official national income data shows that the Survey’s 6.5 per cent growth projection for FY24 constitutes a major acceleration over the 4.3-4.4 per cent growth projected by the NSO (and Reserve Bank of India, separately) for the latter half of FY23. This is because the NSO had estimated FY23 first half GDP growth (published on November 30, 2022) at an eye-watering 9.7 per cent, thanks to the healthy bounce off the Delta-hammered low GDP base of first half FY22. Stripped of this abnormal base effect, second half FY23 growth was officially projected at well under 5 per cent. Against this background and the very difficult and uncertain global economic environment for FY24, the Survey’s expectation of 6.5 per cent (and the associated range of 6-6.8 per cent) does look a bit aspirational. I remain more comfortable with my own guesstimate (see “Will 2023 be any better?” Business Standard, December 15, 2022 ) of 5-6 per cent GDP growth in FY24. Some investment banks, such as Nomura and J P Morgan, expect closer to 5 per cent.

Finance Minister Nirmala Sitharaman’s fifth Budget has been rightly lauded for its responsible revenue and expenditure projections (the basics of any budget) and skilful mix of programmes and tax initiatives to appeal to a wide and varied audience of stakeholders, especially in the context of the election-heavy year ahead. For me, the continued emphasis, for a third year in a row, on accounting transparency, reasonably conservative projections for nominal GDP growth and gross tax revenue (10.5 per cent for both), the strong increase in capital expenditure and some forward movement on fiscal consolidation (from the stratospheric heights of 2020-21) are particularly praiseworthy.

On the last of the quad, I would have liked to see a little more consolidation, perhaps targeting a central government fiscal deficit of 5.5 per cent of GDP, even if that meant some moderation of the capital expenditure surge. In saying this, I am swayed by a number of factors. First, a 5.9 per cent central deficit indicates a combined (Centre and states) or general government deficit of about 9 per cent of GDP, and a public sector borrowing requirement of at least 10 per cent, both of which would be at the upper end among middle income countries. Second, the associated high market borrowing requirements would keep interest rates higher and be more of a discouragement to the long-needed private investment revival. Third, interest payments will pre-empt 24 per cent of total budgeted expenditure in FY24 (as compared to 19 per cent in FY21) and eat up 41 per cent of revenue receipts (as compared to 36 per cent in FY20). Fourth, it is quite possible that a lower fiscal deficit would be more expansionary via interest rate moderation effects than the direct expenditure foregone, as argued persuasively in the Economic Survey.

Looking ahead, the prospects for further fiscal consolidation at the central government level will be challenged by the near stagnancy of the ratio of gross tax revenues to GDP, which has stayed at 10-11 per cent of GDP for over 30 years. Budgeted at 11.1 per cent in FY24, it was not much different from the 10 per cent average of 1989-1991 and below the peak of 11.9 per cent achieved in 2007-08. This is despite the fact that real per capita national income has more than tripled in the last 30 years! Clearly, for sustainable fiscal consolidation and fiscal balance we need to undertake serious reforms of tax policy and administration to raise this ratio by at least 1-2 percentage points soon.

One critical area of macro balance and potential economic dynamism receives disappointingly little attention in the Finance Minister’s Budget speech and proposals, namely international trade and the balance of payments. And this is in a context where India’s current account deficit is at an uncomfortably high 3 per cent of GDP in FY23 (and likely to remain close to that level in FY24) and goods exports have been stagnant in the previous decade and are again flagging after a welcome surge in 2021-22. It is generally recognised that sustained rapid export growth is essential for both a resilient external balance and for sustained rapid growth of GDP and employment. Yet, between 2011-12 and 2019-20, the share of total exports in GDP fell from nearly 25 per cent to 19 per cent, mainly because of a steep fall in the share of goods exports from 17 per cent of GDP to 11 per cent during this period. The surge in goods exports in 2021-22 raised its share of GDP to 13.5  per cent and, coupled with a sustained strong performance of service exports, increased the total exports share to 21.5 per cent, still well below levels of a decade ago.
 

^{Illustration: Binay Sinha}

One of the reasons for our weak export performance in the past decade was the trend in rising customs tariffs (especially on inputs and intermediates), which increased the average most-favoured-nation (MFN) applied tariff on non-agricultural imports by 50 per cent , from 10 per cent in 2015 to 15 per cent in 2021 (as per World Tariff Profiles compiled by WTO and UNCTAD) at a time when our East Asian peers and competitors kept their MFN tariffs much lower and reduced them further effectively through active participation in various free trade agreements (Vietnam was a prime exemplar of this strategy and tripled her share of world goods exports to 1.6 per cent, about the level at which India’s share has stagnated for long).

Against this background, I had hoped that the Budget would announce wide ranging reductions in tariffs, at least on inputs and intermediates, to promote manufacturing competitiveness, exports and greater participation in global value chains. There are a few scattered examples of such reductions mentioned in the Budget speech and accompanying documents, but they are a long way from constituting an across-the-board strategy to grow our manufactured exports in a sustainable way.

The writer is honorary professor at ICRIER, former chief economic adviser to the Government of India and author of An Economist at Home and Abroad (Harper Collins, 2021)