Informist, Thursday, Jan 11, 2024
--Economist Charan Singh:See FY25 GDP growth at 8.0-8.5% on big capex
--Economist Charan Singh: India FY25 nominal GDP seen at 13.0-13.5%
--Economist Charan Singh: India FY25 CPI inflation seen at 5.0-5.5%
--Economist Charan Singh: Budget to focus on fiscal consolidation
--Economist Charan Singh: Govt to continue with capital expenditure
By Priyasmita Dutta and Pratiksha
NEW DELHI – India's latest GDP data brought a surprise on the upside. The economy is likely to sustain this momentum, and the real GDP growth will rise to 8.0-8.5% in 2024-25 (Apr-Mar) on the back of robust public capital expenditure and its multiplier effect, said economist Charan Singh.
"This government will pump as much money as required, but most of it will be planned in such a way that it has a multiplier effect in the long run," said Singh, chief executive officer and founder director of think tank EGROW Foundation. Singh is also the non-executive chairman of Punjab and Sind Bank, and has earlier held key positions such as senior economist at the International Monetary Fund and research director (economic policy, debt management) at the Reserve Bank of India.
According to the government's first advance estimate released earlier this month, India's GDP growth is projected to rise to 7.3% in the current financial year on the back of strong government-led investment. The Economic Survey had pegged GDP growth for the fiscal year at 6.0-6.8%.
Detailing his outlook for the Indian economy in the next financial year, Singh said he expects the country's nominal GDP growth to be 13.0-13.5% in 2024-25 and headline inflation at 5.0-5.5%. The economist also said he expects the government to continue with its pet plan to invigorate the economy – "they will continue with capital expenditure," he said.
The Narendra Modi government has been focussing on capital expenditure to crowd-in private investment and create a multiplier effect on the economy. It has more than doubled its capital expenditure in just three years, and has set a Budget target of 10.01 trln rupees for 2023-24 from 4.26 trln in 2020-21.
Asked about the government's fiscal consolidation plans amid continued robust momentum in capital expenditure, he said this government had shown promise in this regard. "It is a Vote on Account, but it is the last Budget before the General Elections. So I would expect that they will continue with their fiscal consolidation which they have demonstrated in the past," he said.
In a General Election year, the incumbent government presents an Interim Budget to Parliament. Once the new government assumes office, it presents a regular full Budget. In an Interim Budget, a Vote on Account is passed for a part of the fiscal year, pending the passage of the regular Budget. A Vote on Account is a constitutional provision that empowers the Lok Sabha to allow the government to make expenditure for a part of the financial year.
"They will meet the targets as they have announced, and I think Finance Minister Nirmala Sitharaman also has a knack of delivering what she offers," Singh said. Sitharaman, in her Budget speech for 2021-22, had said the government aims to lower the fiscal deficit to below 4.5% by 2025-26. This target was higher than the 4.0% recommendation of the 15th Finance Commission.
The Budget for 2023-24 has pegged fiscal deficit at 5.9% of GDP, compared with 6.4% reported in 2022-23. In absolute terms, the fiscal deficit in Apr-Nov narrowed to 9.07 trln rupees, down 7.3% from 9.78 trln rupees a year ago, latest data shows. This fiscal deficit for the first eight months of the year was 50.7% of the 17.87-trln-rupee aim for the entire financial year, as against 58.9% a year ago.
While the finance minister has herself said the Interim Budget may not have any "spectacular announcement", Singh said she may pull a rabbit out of her hat.
There is scope for the government to announce the development of new cities that will become powerhouses of economic activity, he said. "In a growth-oriented or growth-seeking country with a very young demographic dividend, you may be exploring various ways to keep them engaged, make the country productive. So I am sure they will do some creative thinking."
Below are edited excerpts from the interview:
Q. What do you think will be the theme of the upcoming Budget? Continued focus on investment or fiscal consolidation?
A. I think they are going to come out with a very balanced Budget. It is a Vote on Account, but it is the last Budget before the elections. So I would expect that they will continue with their fiscal consolidation which they have demonstrated in the past, which means responsible fiscal policy, which is the hallmark of the present government. In the midst of a very deep crisis, they still held on to fiscal responsibility and budget accountability. And I think they will continue with that trend.
For good fiscal policy, you have to have a good amount of capital expenditure. That is exactly what this government did in the past. They will continue with capital expenditure.
Q. Do you think the government is on track to bring its fiscal deficit to below 4.5% of GDP by 2025-26?
A. This government is very, very careful with what it announces and then lives up to what it says. It has already made a promise of fiscal consolidation and I think they will not deviate from that path.
The other thing is that its finances are doing well, tax collections are good, the GST is working very well. Therefore, the path of fiscal consolidation will be strengthened as days go by. They will meet the targets as they have announced, and I think Finance Minister Nirmala Sitharaman also has a knack of delivering what she offers.
Q. To what extent do you think the lower-than-expected nominal GDP is going to impact the fiscal deficit for 2023-24? Where do you peg it in the next financial year?
A. Lower nominal GDP is a reflection of inflation under control. But the real GDP is doing much better. It is doing much more than expectations. We are on a very good trajectory in that sense.
For 2024-25, the nominal GDP would be in the range of 13.0-13.5% with real GDP estimate at around 8.0-8.5% and inflation at 5.0-5.5%.
Q. So you don't see inflation being sustainably below 4.0%, going ahead?
A. If you look at the 30-year average of inflation in this country, it is in the range of 5.0-6.0%. Bringing it to 4.0% is rather a challenge, though the projections made by the IMF and World Bank are around 4.0%.
My feeling is, given the circumstances, uncertainty and the challenges that we have... the Russia-Ukraine war is on, Palestine-Hamas and Israel problem is on, there is an election year in India and the US. There is too much of uncertainty all around... I think some pressure on commodities will continue to be there. There could be some pressure on oil also. Therefore, we may not be at 4.0%.
Q. Do you see the government cutting down on capital expenditure any time soon? Do you think the multiplier effect of the capital expenditure cycle has already kicked in?
A. The capital expenditure is the beauty of this government. This government plans in a very different way than the other governments. In the midst of the crisis of COVID also, they were planning futuristic. I have a very simple theory. There is an absorptive capacity for every individual. You cannot consume more than the absorptive capacity of the digestive system, it is better to be organically growing. There is no point pumping in money where it is not working or is getting wasted.
This government will pump as much money as required, but most of it will be planned in such a way that it has a multiplier effect in the long run. That is what capital expenditure does – it creates employment and it has long-term implications, and it has a multiplier effect, almost double that of revenue expenditure.
So I think that the government will continue with this policy of well-balanced expenditure.
What is required will be done on the revenue account, what needs to be taken into the capital account will be taken into the capital expenditure. So capital expenditure will continue to grow. And I don't think that they will slow down on capital expenditure.
Q. Do you think the government will increase its allocation to populist plans like Mahatma Gandhi National Rural Employment Guarantee plan, especially considering this is right ahead of the General Elections?
A. This government does not succumb to short-term freebies. They will continue to have a long-term vision and long-term growth. They are already on a very strong base. So they need not do things which will deviate from their long-term vision and policy or which will be different from the long-term ethical policy that they like to pursue.
Q. Is there any need for any incentives for the banking sector in this Budget?
A. No, the banking sector is doing exceedingly well. If you look at the trend and progress in the financial stability report that has just been released, the banking industry is doing very, very good. I do not see any need for support or any help that is needed for the banking sector.
Q. Do you think bank privatisation is still on the cards?
A. Not sure. That is a very sensitive issue. I think the consolidation of banks has already taken place. When it comes to privatisation, I think it is premature to say anything. It is election time and one generally does not like to experiment with different policies around that time. However, privatisation does not just mean the way you did for Air India. You can also open up the banks for more private sector and stock market participation.
Q. The IMF recently expressed concern about the sustainability of India's public debt. What is your reading of the situation?
A. If you look at India's debt vis-a-vis any other country, we are in a far more robust place. So, I do not see any fear there. The issue is that if you take a comparative picture of debt-to-GDP ratios of other countries, including that of the advanced countries, you find India is not an outlier. So yes, we will be cautious about it. We are aware that it has gone beyond a certain threshold, but if you look at the rest of the world, they are passing through a much more difficult situation.
So, when we are all interconnected through spillovers, expectations, trade and financial services... obviously, there is a possibility that spillovers will take place and our debt-to-income ratios will also rise. We are not on the margin, or we are not an outlier that one should be worried about.
Q. Do you think the government will now start lowering its market borrowing, especially as the repayment burden piles up?
A. Given the good fiscal position in terms of tax collections, we may not need to enhance market borrowings, and over a period of time, the market borrowings will follow their own trajectory. If we have to do a correction to the debt-to-GDP ratio, obviously, that correction will also be reflected here. I do not see any reason to fear that market borrowings will crowd out the private sector.
Q. Do you think the finance minister will pull a rabbit out of her hat in the Interim Budget?
A. In a country which is growing, there is a constant demand for resources and there is a constant requirement for growth and growth centres. I will not be surprised if she has a few thoughts because everybody is giving her inputs, and she has her own mind too.
And they have always come up with something very innovative. So, setting up a new city or establishing another city is so productive and so growth-oriented... you can set up commercial cities, IT cities. You could probably be establishing a Hyderabad, Bangalore type of a city in north India. Or you could be thinking of developing a city in the northeast. There are so many new projects that need to be made.
So, in a growth-oriented or growth-seeking country with a very young demographic dividend, you may be exploring various ways to keep them engaged and make the country productive. I am sure they will do some creative thinking, and they could think about it, formalise it and then implement it. End
Edited by Ranjana Chauhan
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