All economics is essentially articulation of contextual postures in politics. India’s budgets have validated this truism year after year. In 1991, Manmohan Singh borrowed words from Victor Hugo and declared that no power can stop an idea whose time has come, as the Indian economy was opened up. In 2009, in the wake of the global financial crisis, Pranab Mukherjee paid tribute to the nationalisation of banks in 1969 and celebrated government expenditure crossing the `10-trillion mark. The Modi Government, in its two terms—particularly in the aftermath of the pandemic and geopolitical tensions which wrecked business and economic models of nations—renewed the construct of economic resilience to present the idea of Atmanirbhar Bharat.
On Thursday, Finance Minister Nirmala Sitharaman opened her speech with the declaration, “The Indian economy has witnessed profound positive transformation in the last 10 years.” In the run-up to the 2024 elections, the Finance Minister presented to Indians—in a speech spread over 5,200 words, laced with Modi’s quotes, embellished with data and punctuated by slogans—an illustrated account of the approach and accomplishments of the government. The 2024 budget pitch revolves around a new acronym GYAN—gareeb, yuva, annadata and nari—which addresses the bottom of the economic pyramid, the catchment zone of electoral politics inhabited by nearly a billion voters.
It is, verily, the preface of the election campaign. The foundation for the ambition of a third term is built on a huge investment in physical and digital infrastructure. The Modi government has, in the past nine years, taken overall public sector capital investment from Rs 5.6 lakh crore when it assumed power and trebled it to over Rs 18.6 lakh crore. It is building roads at the rate of 28 km per day and laying railway lines at around 15 km per day. India had built 74 airports in the first 67 years of independence; the number was doubled over the last decade to 149. In its effort to expand financial inclusion, the government leveraged Aadhaar to open 51.6 crore Jan Dhan accounts. This has enabled delivery of welfare payments of Rs 34 lakh crore in all through direct transfer of benefits.
In the quest to bridge the gap between incomes and access to living standards, it provided pucca houses to over 2.6 crore families. Over 10 crore families have been provided with LPG connections. The Ayushman Bharat scheme has enabled over 6.27 crore hospitalisations. This year’s essay signals a continuation of the approach––from the installation of rooftop solar in one crore homes to the creation of a corpus of Rs 1 lakh crore for long-term financing at zero or low interest rates for young entrepreneurs. It underlines this with an allocation of Rs 11.11 lakh crore in infrastructure—the effective capital expenditure, at Rs 14.14 lakh crore, is an increase of 17.7 percent over the revised expenditure for 2023-24.
Budget 2024 is also the prologue to the construct of Viksit Bharat—the aspirational idea of a developed economy. The sterling surprise of the essay is the promise to bring down fiscal deficit by 0.7 percentage points to 5.1 percent of the GDP in the coming year. It has also brought down gross and net borrowings—both in ratio to the GDP and in absolute terms—to Rs 14.13 lakh crore and Rs 11.75 lakh crore respectively. The approach is to leverage the demography, democracy and diversity of the economy. The strategy is to present Atmanirbhar Bharat to global investors.
The move is located at the intersection of aspiration and compulsions. Consider the aspirational aspects first. The outcomes of the recent state elections promise political stability after the general elections of 2024. The granular detail of the interim exercise eschews any change or tinkering with tax laws and comes embedded with the predictability sought by investors. In the past decade, India has moved up on GDP rankings from the tenth largest economy to the fifth largest in 2023. Its financial offerings have found acceptance on global indices in financial markets—the latest being its inclusion on JP Morgan’s emerging market government bond index. India has also been arguing for some years that the assessment of India by ratings agencies is flawed.
The ambition faces political and economic realities. Classical economic theory tells us that gross domestic product is C+I+G+(X-M). Essentially, economic output is measured as the sum of consumption plus private investment plus government expenditure and net exports. The government is faced with a conundrum. While spending on infrastructure has gone up and fuelled growth, the push is not visible in private sector investment. Worse, the growth is not broad enough to propel private final consumption.
Companies engaged in production of entry-level consumer goods, durables and automobiles have been candid about the lack of offtake in rural areas; they interpret this as a problem of income at the bottom of the pyramid. Consumer goods companies are worried about sluggish demand even in the festival season this year. Automobile giant Maruti Suzuki flagged a decline in the offtake of entry-level models, Bajaj Finance shares tumbled this week as the company flagged issues with business-to-consumer and rural segments. Indeed, business chamber members have been advocating measures to prop rural demand, ranging from more allocation for MGNREGA to higher compensation for farmers to free spending power.
The reduction of fiscal deficit and lowering of borrowings opens up room for the Reserve Bank of India to bring down the cost of capital—the hope being this will rekindle the Keynesian animal spirits to nudge private sector investments and enable consumption as interest rates and inflation taper. The move is a measured attempt to invite a re-assessment of India’s macro fundamentals among its emerging-economy peers. One of the factors influencing foreign portfolio and direct investment is the cost of capital, which is influenced by the level of debt in relation to the GDP, fiscal deficit and government borrowings. For instance, Vietnam and Mexico, both beneficiaries of friend-shoring and near-shoring of manufacturing, have a lower fiscal deficit to GDP ratio.
There is no quarrelling with the smart approach. However, much more needs to be done. For instance, bringing down government debt by monetising the value of its assets and investments in public sector enterprises. To lure investment, India will also have to unclog the regulatory cholesterol, push state governments to adopt friendlier labour codes and land acquisition laws, and enable plug-and-play opportunities for investors. Much also depends on the geopolitics, which influences geo-economics. It is said that fortune is at the intersection of opportunity and preparation. This, in a sense, is only the beginning.
(shankkar.aiyar@gmail.com)