What are the key economic issues that the next union budget needs to address?
Given the expectations of continued global instability, the union budget needs to provide impetus for building economic resilience and nudge the economy towards growth derived from intellectual innovation and green practices. The budget allocation has to be biased towards productive spending and taxation has to decisively favour fresh and large investments in high-potential sectors and green technologies.
The budget needs to commit greater direct investment in foundational sectors such as education, healthcare and infrastructure while prodding the private sector to undertake greenfield investments in sunrise sectors, which are critical for broadening the geographic base of the economy and creating new jobs. Even as the government tries to lead capex and GDP growth, it needs to be mindful that its financing efforts do not cramp wider private investment and consumption.
The budget needs to provide a clear and credible path towards the handing over of the growth leadership to private initiative and consumption quickly and seamlessly.
What are your expectations of economic growth trends beyond the immediate struggles?
India is better positioned than most large economies to weather the economic disruptions and distortions caused by geopolitical scuffles, which are likely to continue in some form or the other for the foreseeable future.
The reliance on the domestic market and production is a source of resilience in bad times, even though it restricts India's external growth potential. India is cranking up investment and it has ample capital to do so, and its upwardly mobile population has an inexhaustible pent-up demand for all kinds of products and services. India is also trying to align itself with the richest economies of the world to have access to their capital, technologies, supply chains, and markets.
Even the factors contributing to India's immediate growth struggles are not durable. Barring any fresh disaster, the food and energy inflation are likely to recede in coming months and the cost of money is likely to start easing up after one or two further episodes of hikes. Though the first half of 2023 may be tough, India's output and consumption growth is likely to return to the natural level after that. That is if another unforeseen crisis does not ruin the plans once again.
What kinds of further fiscal and monetary response do you expect from the government in the face of a global economic slowdown?
While the government must spend more to support business and livelihood at a time of economic instability and uncertainty, it needs to ensure that its excess spending does not become a trap. The government's spending and its borrowings need to be managed with care and finesse so that these are brought down quickly but not abruptly. The budget is expected to balance the need for increased government investment with cost cutting in government spending. The budget can be expected to balance the need for curbing the imported inflation with the need for driving exports through trade agreements.
The tariffs could be calibrated to allow upgrading of the domestic production and exports while making discretionary imports less attractive. The fiscal deficit can be expected to be brought down decisively over the next year, probably below 6%, and the government's debt also can be expected to be contained at 80%-85% of the GDP. On the monetary side, the interest rates may go up once or twice before the normal service of cheap and abundant money resumes. But all that is contingent on absence of any further economic disruption.
What kind of production and consumption impact do you expect because of the government's increased spending and RBI's inflation control measures?
While the interest rate increases will make investors and consumers cautious in the short run, their behaviour will be determined by economic stability in the coming months. Given the huge room for growth in both production and consumption in the economy, India can live with occasional swings in costs of living and doing business.
The government's spending and investment agenda gives confidence to the industry that it would have buyers in the domestic market even at slightly elevated price levels. In fact, the government's growing budget adds to the industry's confidence in the capacity expansion. The consumption trend will be shaped by the government's ability to provide business to the industry and jobs to the people in the short term.
A strong momentum in the economy would also soften the inflation and allow the RBI to switch from inflation containment to growth reinforcement.
What could the government do to sustain a high GDP growth level without losing fiscal discipline?
The current economic situation requires the government to accept some fiscal laxity to support investment and consumption and enable long-term confidence in the economy for the industry and the investors to place bets on greenfield ventures.
However, the government must not get used to driving the economy directly and broadly. Sustaining a high level of GDP growth without losing the fiscal shape requires the government to crowd in private initiative and money into the strategic and the sunrise sectors, as that is where the potential for wealth and job creation is the highest.
What can India Inc do to deal with the domestic growth challenges and the impact of global economic distortions and disruptions?
The slowdown in the national and the global economies requires India Inc to become less conservative and not more. High inflation and demand constraints need to be overcome by getting creative with value propositions of products and services and reaching out to supply sources and markets across the planet. Too many Indian enterprises are too reliant on the domestic market and government policies to exit and grow.
However, the characteristics of the domestic market require India Inc to be more dynamic in global sourcing and selling. Even as the disruptions and distortions in global trade constrain the immediate growth of many Indian enterprises, these disturbances also present unprecedented opportunities for India Inc to offer alternatives to the global producers and consumers.
The key to overcoming domestic growth challenges and capitalizing on global rearrangement is intellectual property. Indian Inc needs to innovate and align itself with the latest policy and popular trends in the world. The time for national competitiveness based on lower labour and environmental standards is gone and being up to the global buyers' ESG standards is necessary to gain access to markets and investment. India Inc needs to become a creator and licensor of intellectual property while it tries to catch up on technologies and innovation.