Strategies for Steady, High Growth in India in 2023-24
As the world slowly recovers from the COVID-19 pandemic, the global economy has been hit by another major setback: Russia's invasion of Ukraine. This unexpected event has disrupted the supply of critical imports, causing prices to increase sharply and derailing many economies. Despite a relatively better performance, India has also been affected by this crisis and the return to normalcy has been delayed. With the end of the present fiscal year approaching, India's GDP is only projected to be 8.57% higher than its level in 2019-20, averaging 2.86% growth for the past three years. To ensure steady, high growth with reasonable price stability, the upcoming Budget for 2023-24 must focus on certain key areas.
In 2022-23, real Gross Value Added (GVA) is estimated to grow by 6.7%. Every output sector has turned positive as compared to the pre-COVID-19 year of 2019-20. This means that the 2023-24 Budget will pertain to the first normalised economy after the pandemic shock. The expectation is that nominal GDP in 2023-24 may be close to ?300 lakh crore, based on a nominal growth of about 11-11.5%, which implies a real growth in the range of 6-6.5% and a deflator-based inflation in the range of 4.5-5%. However, it is important to note that real growth in the second half of 2022-23 is only 5.5% as per the advance estimates.
The policy response to the COVID-19 shock, which affected 2020-21, was a sharp increase in the Centre's fiscal deficit to 9.2% of the GDP, more than three times the original Fiscal Responsibility and Budget Management Act (FRBM) norm of 3%. In the two succeeding years, fiscal deficit could be reduced to 6.7% and 6.4%, respectively. With 2023-24 being the first genuine post-COVID-19 normal year, it would be best to spell out a convincing path towards the prescribed fiscal deficit ratio of 3%. This calls for a total adjustment of 3.4 percentage points of GDP. Given this task, a reduction of at least 0.7 percentage points may be targeted for 2023-24.
Global Economic Slowdown
It is important to recognize the challenges to India's growth prospects in view of the global economic slowdown. Multilateral institutions such as the Organization for Economic Co-operation and Development and the International Monetary Fund have projected global growth prospects and India's growth prospects for 2023-24. The OECD has projected a growth rate of 2.2% for the global economy in 2023 and 5.7% for India in 2023-24, while the IMF has projected global growth at 2.7% and India's growth at 6.1%. To achieve a growth in the range of 6-6.5% in 2023-24, significant policy support will be required.
The need for correction in the government's fiscal deficit primarily arises because of the relative profile of savings and investment as a proportion of GDP. Financial savings along with net inflow of foreign capital provide the extent of surplus available for the potential net deficit sectors in the economy, which consists of the public sector (government and non-government) and the private sector. To balance this, the household sector financial savings should be at 8% of GDP and net inflow of foreign capital should be 2.3% of the GDP, assuming that States are allowed a fiscal deficit of 3.5% of the GDP in 2023-24.
The upcoming Budget for 2023-24 must focus on key areas such as growth performance, fiscal deficit, global economic slowdown, and saving-investment balance to ensure steady, high growth with reasonable price stability in India. Despite the recent setback of Russia's invasion of Ukraine, it is important to stay optimistic and take the necessary steps to recover and move forward. With the right policies in place, India can achieve the projected growth rates and return to a normalised economy post-pandemic.