As Finance Minister Nirmala Sitharaman prepares to unveil the vote-on-account budget for FY25 on February 1, the Indian economy stands at a crucial crossroads. Recent macroeconomic numbers carry both good and bad news for the Finance Minister.

On a positive note, the growth projections are optimistic. NSO’s advance estimates of GDP and forecast by the RBI indicate a healthy real growth rate of 7-7.3 per cent in FY24. This will likely give more headroom to formulate the revenue and expenditure estimates in the budget. Arguably, it will be a tricky balancing act, given the strong expectations of a populist budget in a general election year. As the incumbent government vies for its third term in office, there will likely be a substantive increase in welfare spending.

The twin deficit numbers should also provide comfort. Goldman Sachs has revised India’s current account deficit (CAD) forecast to 1.3% of the GDP from 1.9% earlier on account of higher services exports and lower oil prices. Also, higher revenue receipts should help meet the budgeted fiscal deficit of 5.9 per cent of GDP comfortably.

Industry worries

On the other hand, recent data on industrial production growth and inflation portend strong economic headwinds. The negative IIP output growth in consumer durables (-5.4 per cent), consumer non-durables (-3.6 per cent) and capital goods (-1.1 per cent), indicative of a strong contraction in rural and urban demand.

Notably, India’s retail inflation has touched a four-month high of 5.7 per cent in December 2023, pulled up by 9.5 per cent food inflation.

While we should not expect any spectacular announcements in the interim budget, it is crucial that the budget addresses macroeconomic concerns, balancing economic imperatives with political exigencies.

IIP worries

First, the stark plunge in India’s industrial production growth underscores a pressing need for demand-side intervention to reignite the industrial engine. In particular, rural demand has been under stress since the pandemic, affecting volumes growth for FMCG, automobiles, housing, and retail industries.

FMCG sales in rural areas fell 9.6% year-on-year (YoY) in November 2023, while average work demanded under MGNREGA in October-November 2023 was 26-31% higher than the pre-Covid period, both indicating growing rural stress. The budget must announce measures to augment rural incomes, including schemes that generate higher non-farm income, especially for small and marginal farmers.

Budgetary support to rural financial institutions for accelerating financial inclusion and expanding access to credit is an urgent imperative.

Inflation pain

Second, in the context of rising headline and food inflation, the Budget needs to complement RBI’s monetary policy measures, while addressing the pressing supply-side challenges plaguing the economy. Allocations to schemes like the public distribution system (PDS), fertilizer subsidy, and PM-Kisan account for almost 90 per cent of the agriculture sector budget.

Some budgetary reallocation is necessary to promote initiatives that enhance long-term agricultural productivity. Like PLI schemes (in manufacturing), production and employment-linked schemes in the agriculture sector can mitigate food price volatility and ensure price stability. Budgetary measures, including targeted tax incentives to safeguard households’ purchasing power, will be necessary.

Third, sustaining the growth momentum will require a fiscal push to sectors that are likely to be new growth drivers of the economy. The Finance Minister should prioritise investments and fiscal incentives in emerging industries like renewable energy and climate tech, fintech, electric vehicles, healthcare and insurance, biotechnology, AVGC (animation, visual effects, gaming, comics), R&D, and artificial intelligence (AI) to stimulate innovation, job creation, and growth.

Easing credit

Fourth, the Budget should introduce measures to ease credit availability and access to working capital and investment funds for the micro, small, and medium enterprise (MSME) sector, which accounts for around 40 per cent of India’s exports. To complement, increased allocation on roads, ports and logistics will be critical.

Finally, as India prepares to join the JPMorgan and Bloomberg emerging market indices in 2024, the Finance Minister will need to tread the fiscal glide path cautiously. Foreign investors and rating agencies will closely monitor the government’s commitment to further narrow the deficit to below 4.5 per cent of GDP in the next two years.

An overtly populist budget may undermine the government’s own hard work on fiscal consolidation in the post-pandemic era.

The writer is Assistant Professor, IIM Ranchi. Views are personal.

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