Towards ‘disciplined’ growth

In the upcoming Union Budget, the Central government will face a big challenge of balancing between two important aspects — growth and macroeconomic stability. Given the set of contexts amid which the Budget will be presented, the task appears uphill. In the first place, certain geopolitical disturbances have not yet subsided — leaving behind an unfavourable climate in which the Indian economy will be forced to operate through the next fiscal. There is still no end in sight for the Russia-Ukraine war, and the Covid surge in China has demonstrated that the time to be complacent has still not arrived. Second, domestically, it will be the last full Budget of the Modi government before the long-awaited 2024 general elections. This, it is expected by some, may tempt the government to decide in favour of a populist Budget. How much room the government have to go for such a Budget is an altogether different question. Third, unemployment and declining wages remain a grim reality for India even as it enters a new fiscal year. Fourth, climate risks are intensifying globally, and so is the need to incorporate the climate economy in a larger scheme of things. The government is expected to make some significant announcements in this regard. Fifth, India continues to face challenges along the borders with both China and Pakistan, which has created a need for greater defence expenditure. Sixth, there is the perennial context of expectations around tax cuts. By and large, the Indian economy is committed to sticking to the downward slope of fiscal deficit. Credit to robust revenue growth and money saved on account of a single nodal account, there is a high probability that the present year’s fiscal deficit target of 6.4 per cent will be conveniently met. The broader goal, however, is to narrow down the fiscal deficit to around 4-4.5 per cent by 2025-2026. The ideal limit for fiscal deficit, as prescribed under the Fiscal Responsibility Budget Management (FRBM) Act, is three per cent, and that for revenue deficit is zero per cent. Experts at Barclays have speculated that the government can eye for a target of 5.8 per cent in the coming fiscal — asserting that the Budget will most likely balance the needs of fiscal prudence against the desire to support economic activity. Sticking to this fiscal target will leave little headroom for the government to spend on welfare and populist measures, but will that be a strong enough deterrence for the election-bound government? Within the limited headroom, if the government goes for some kind of subsidy or welfare allotment, it should not come as a surprise. Even though the government doesn’t get tired of patting its own back on India being the “fastest growing” economy while developed countries grow at a “slower” pace, the grim situation in terms of unemployment and declining wages cannot be neglected. The demand is worse than slow to pick up. Against this backdrop, the government’s focus on promoting growth cannot be discredited outrightly. The Reserve Bank of India is following the footsteps of the US Fed in terms of monetary policy tightening. Speculations are that a similar fiscal tightening may also be exercised by the government to control inflation. This theory may however be flawed. On the contrary, the fiscal stance needs to be accommodative to balance the inflation containment inclination of the RBI. But one would agree that the government cannot afford to spend too much on subsidies and all. It may be noted here that already, more than half of the government’s expenditure goes into financing interest payments, defence expenditures, subsidies and salary/pensions. What the present government can do at best is to continue its budgetary focus on capital expenditure. The government may go for a higher budgetary allocation allowing for an infrastructural push. This can help attract private investment in multiple sectors and employ a significant number of people at the same time, leading to an uptick in demand and, hence, growth. In fact, it is almost obvious that the government will bank upon infrastructural and logistical investments on its part. The real catch will be to pacify popular aspirations — both in terms of welfare measures and tax deductions. The government needs to avoid these temptations and act prudently to ensure macroeconomic stability. The government should also not fall for temptations that envisage targets beyond the fiscal year. Should an annual Budget be expected to deliver results 25 years down the line?