Budget Expectations: Growth and Inflation

22 Jan 2024 , 07:41 AM

GROWTH IS GOOD, BUT YEH DIL MAANGE MORE

According to the latest RBI estimates outlined in the December monetary policy, the GDP growth for FY24 has been upgraded from 6.5% to 7.0%. For FY25, the estimated growth rate still stays closer to 6.5%. That would mean that for 3 years in a row, India would be the fastest growing large economy in the world. When we talk of large economies, we are specifically referring only to economies with annual GDP of more than $1 trillion. In the last 3 years, growth was achieved in two phases. The first phase was the lag effect of the all the liquidity infusion by the government and the recovery post the COVID pandemic.

That kept the growth rate buoyant in the second half of 2021 and 2022. In 2023, while industry and the services sector picked up, the major thrust to growth came from better control over inflation. Even through nominal growth may not have flattered, the real growth was still good due to the benefits of lower inflation. Going ahead, in 2024 and 2025, the growth is more likely to come from structural reforms, which is what the Union Budget 2024-25 is likely to focus on. Let us look at the macro pros and cons as we stand today.

GREEN SHOOTS OF GROWTH ARE UNMISSABLE

Here is what stands out about the current macro scenario in India as we go into the presentation of Union Budget 2024-25.

• In the fist two quarters of FY24, India has reported GDP growth of 7.8% and 7.6% respectively. Even as the world has shown signs of slowing, the robust domestic demand has helped the inward looking sectors, driving growth in the process.
• Credit growth has shown distinct signs of accelerating in the current year. There are problems in the sense that credit growth is now distinctly quicker than deposit growth, but that is off the point. However, there have been concerns that the credit growth has been largely driven by funding for the service sector and by consumer loans.
• The small and medium enterprises (SMEs) have shown a lot of traction in recent quarters. One classic giveaway is the robustness in the SME segment of the NSE and BSE. MSMEs are seeing higher credit flows from banks even as the delinquencies and non-performing assets are coming down.

Let us now turn to some of the risks in the current macroeconomic scenario.

THERE ARE SOME RISKS TO GROWTH TOO

It is not all hunky dory and there are some distinct risks to the India growth story emanating from prices and global risks.

• The food basket has created most of the problems for India in the last few months. Even for the month of December 2023, food inflation was up at 9.53%, largely led by a spike cereals and pulses due to lower than expected Kharif and Rabi output this year. That is likely to be a challenge for real growth and for the RBI policy this year.
• There are political risks and also geopolitical risks at this juncture. The political risks emanate from the uncertainty over the elections in India and mid-2024. In addition, this is going to be an intense election year globally. But the bigger geopolitical concern is the ongoing stand-off in West Asia and the worsening Red Sea crisis, impacting world trade.
• There is a sharp dichotomy in demand revival in India post pandemic. For instance, many of the luxury goods, apartments and services and found a lot of takers from the well-heeled segments. However, the mass demand as well as rural demand have struggled to revive and that has been one of big divergences in demand that has capped the revival.

This macro situation lays out the agenda for what to expect from the Union Budget 2024-25 on the growth and inflation front.

BUDGET 2024-25 – HOW IT CAN DRIVE GDP GROWTH

Since we will deal with inflation separately, we focus on the nominal growth boost. In fact, one of the key differences between FY23 and FY24 has been that the nominal growth has trended lower while the real GDP growth has actually benefited from lower inflation. Hence, the focus here would be on how to boost the nominal growth through the Budget.

1. In the last few years, if there is one factor that has differentiated this government, it is capital spending and the unstinting focus on infrastructure. For example, one only needs to drive down into the interiors of states like Maharashtra, Madhya Pradesh, and Uttar Pradesh to understand how much difference high quality roads have made to the local people and their businesses. Between FY20 and FY24, the infrastructure outlays as a share of GDP went up from 1.13% to 3.31%. That has made the bulk of the difference to the quality of infrastructure in India. That is expected to continue and accelerate closer to 4.0% in the Budget 2024-25. Whether it happens in the interim budget or not, is more of a technical issue. Also, the allocations to green power, urban smart cities and power infrastructure are likely to increase sharp in the coming Union Budget.
2. The government and the public sector took most of the initiative in capex in the last few years. The result is that the order books of private companies in the capital goods and construction space is overflowing. But that is just the start. For this to go to the next step, it should be able to crowd in private sector infrastructure investments. However, that has some pre-requisites. The cost of funds has to come down rapidly, if the private sector has to be incentivized to borrow and invest. Secondly, the PLI (production linked incentives) scheme must be expanded rapidly to more sectors like chemicals, and also to services that can act as a catalyst for more investments.
3. The government has reduced the share of subsidies 8% of the budget outlay to 7% of the overall outlay. That is a good start, but it is still a lot of leakage. The more the government as subsidies, the less it is able to spend on rural infrastructure and boosting rural incomes and that is delaying the revival in rural demand. This is going to be a tough choice between the devil and the deep sea; but the government in Budget 2024-25 has to bite the bullet on this subject to make the story viable.
4. FY24 could be the first year after several years of growth, when exports could actually see a contraction. The exports are already under pressure due to weak demand globally, in the midst of global slowdown fears. In addition, the recent Red Sea crisis is likely to chop off about $35 billion from Indian exports by March 2024. This is a sector that needs some serious incentives in Budget 2024-25. Apart from export promotion boost, the government can also provide higher allocations under the ROADTEP, so that the exports get a boost in the coming year. Remember, MSMEs account for 40-45% of the merchandise exports and incentives to exports would automatically boost the fortunes of the export driven MSMEs also.

The agenda is laid out for the Union Budget on how to boost growth. Infrastructure outlays, private capex and export boost must be at the core of the government efforts to boost growth and that should be reflected in the Union Budget 2024-25.

CAN BUDGET 2024-25 BRING DOWN INFLATION?

Actually, the budget can do a good deal about inflation management and that will happen as an indirect outcome. Here are some measures that can be announced in the Union Budget 2024-25; that will help to contain inflation in the economy.

1. High fiscal deficits (budget deficits) are normally inflationary as they entail higher borrowings and raise the interest rates in the economy. One of the first things the Budget 2024-25 can do is to announce a sharp cut in the fiscal deficit. From 5.9% for FY24 to 5.2% for FY25 will be the right step for the journey towards 4.5% in FY26 as the Budget 2021 had committed. It will also keep inflation in check.
2. Much of the inflation in recent months has come from the food basket. While the basket is still vulnerable to the monsoon vagaries, what can be controlled is the logistics post-harvest. That includes silos, storage, freezing facilities etc so that the wastage is reduced and speed to the mandis can be maintained. That is the simplest step to keep food inflation in check.
3. Government can consider direct tax sweeteners like lower tax slabs and higher exemptions on a targeted basis so as to reduce the burden of inflation. That can act as an antidote for the spike in inflation that we are seeing in the recent months.
4. Lastly, prices are all about indirect taxes, or GST in the Indian context. Reducing the GST on most essential items and recovering through other less burdensome means is one way to keep the price cheer intact.

Budget 2024-25 will be a critical budget. India needs to grow and the budget has to remove the hurdles. A lot depends on what the Finance Minister announces on February 01, 2024.