Time for structural reforms

The near-term economic outlook is good, but achieving ‘developed India’ by 2047 needs accelerated growth.

The World Economic Outlook brought out by the IMF in April did not project an optimistic economic scenario for the global economy. The world economy is estimated to grow at 3.2 per cent in 2024 and 2025, which is the same rate as it was in 2023.

While developed economies are expected to see a marginal acceleration in growth from 1.6 per cent in 2023 to 1.7 per cent in 2024 and further to 1.8 per cent in 2025, emerging economies are expected to see a marginal slowdown to register 4.3 per cent in 2023 and 4.2 per cent in 2024 on average.

On the inflation front, global inflation is projected to decline from 6.8 per cent in 2023 to 5.9 per cent in 2024 and 4.5 per cent in 2025. Advanced market economies are likely to reach the inflation target sooner than emerging market economies, and this could result in lowering the policy rates earlier in the former, with implications for financial flows from emerging market economies.

In this scenario, India has shown a creditable growth performance. In 2023-24, the Second Advance Estimate of National Income places India’s GDP growth at 7.6 per cent and the government’s Chief Economic Adviser thinks that it could even be close to 8 per cent, on the back of impressive growth performance in the first three quarters averaging 8.2 per cent.

This was achieved despite adverse global and domestic environments and risks. While the shocks -- both internal and external -- do impact the economy adversely, India seems to have acquired a certain degree of immunity.

The deficient rainfall, volatility in oil prices, international capital flows, and the global environment, including conflicts, have not adversely impacted the economy as much as they did in the past. There is also a reasonably high degree of political and policy certainty and continuity, which adds to the economic stability and investment climate.

Not surprisingly, most multilateral agencies and credit rating firms present impressive growth forecasts for 2024-25.

The Monetary Policy Committee of the RBI has projected the economy to grow at 7 per cent. The World Bank expects India to grow at 7.5 per cent during the calendar year 2024.

The IMF forecast at 6.8 per cent comes closer to RBI’s projection and the ADB’s forecast is at 7.1 per cent. The election-related spending is likely to keep up the demand for private consumption expenditures in the first quarter of this fiscal.

Although the stock market has shown some jitters, it is widely expected that the ruling party will be voted back to power, though with a lower majority than projected earlier. It is expected that the full-year budget that will be presented by the next Finance Minister will continue the momentum of increasing capital expenditures. Thus, on the demand side, besides elevated levels of private consumption, public investment is likely to remain high, and these can crowd in private investment as well. 

However, stagnancy in the advanced economies is projected to continue, the external demand from net exports will continue to remain muted and that would require structural changes which, in the medium term, is unlikely.

In FY25, the momentum in both the manufacturing and services sectors has continued. The Purchasing Manager’s Index (PMI) in manufacturing in April at 59.1 is a 16-year high and the PMI in services shows only a marginal decline from 61.2 in March to 60.8 in April.

There is no indication to show the possibility of a slowdown, and with a normal monsoon forecast, for 2024-25, a revival is likely in the agricultural sector after a poor showing in 2023-24. With the market expectations of the ruling party returning to power, policy continuation looks likely.

The full-year Union budget to be presented by the Finance Minister after the elections will have to tread carefully in working out the trade-off between hiking capital investment and achieving fiscal consolidation. Nirmala Sitharaman had stated that by 2025-26, the fiscal deficit of the Union government will be brought down to 4.5 per cent of GDP.

The interim budget presented in February has set the fiscal deficit target for 2024-25 at 5.1 per cent and capital expenditure as a ratio to GDP at 3.4 per cent. While the fiscal deficit estimate is likely to be maintained in the final budget, the capital expenditure may come under some pressure if the promises made in the election manifesto are implemented. 

Fortunately, the GST collection has shown high buoyancy, with the April collections estimated at a record Rs. 2.1 lakh crore, which is 12.4 per cent higher than the corresponding collection in April last year.

The high buoyancy is likely to continue and that can provide some cushion in fiscal management. Fiscal consolidation is now critical, particularly with the compressed borrowing space due to a decline in the household sector’s financial savings to 5.3 per cent of GDP. Although the inclusion of India’s Sovereign in the J P Morgan Index can help to garner some funds from abroad, this is not likely to be large, and fiscal consolidation is imperative to avoid hikes in interest rates.

All in all, 2024-25 promises to be better, and the country will continue to experience a high growth rate. The issue of creating employment avenues for the more than 10 million people joining the workforce every year, in addition to accommodating those in low-income generating jobs in the farm sector and informal occupations, will continue to be a challenge, and this requires significant reforms to be undertaken beginning this year. 

We are on course to becoming the third-largest economy. The critical issue is that to reach the long-term aspirational goal of becoming a developed country in 2047, the growth needs to be accelerated to 9.5% annually for the next quarter century, and that will require significant structural reforms. With the much-expected re-election of the ruling party, it should make plans to start the process immediately after returning to power.

(The writer was formerly Director, National Institute of Public Finance and Policy, and Member, Fourteenth Finance Commission. He is currently Councillor, Takshashila Institution)