The Indian Express (Delhi Edition)

A ROADMAP Big reforms push

Emphasis on economic matters and continuity on reforms in President’s speech is heartening. Over to Finance Minister now Budget 2025 is an opportunit­y to present a long-term vision for the Indian economy

IN ONE SENSE, President Droupadi Murmu’s first speech in Parliament follows the broad pattern set by her predecesso­r, Ram Nath Kovind, five years ago. Murmu's address highlights the robustness of the India growth story, the major focus areas of the government, the success of its various welfare policies, schemes and programmes, and the rising profile of the country on the global stage, among others. But, this time around, the President’s address also laid out the broad contours of what economic policy might look like in the coming months.

More importantl­y, Murmu spoke about the new government's first budget in the forthcomin­g session of Parliament. She said that the budget will outline the government's “far-reaching policies and futuristic vision”, and that “many historic steps” will be taken. At a time when there are some concerns over the ability of a coalition government to push through reforms, especially the more contentiou­s ones, it is heartening to hear the President talk of continuity and say that the pace of reforms will be “accelerate­d” in line with the aspiration­s of the people. It is, in fact, difficult to miss the emphasis on economic matters in the speech. The President also spoke about the government striving to ensure that India becomes the third-largest economy in the world — the government has, in the past, spoken about claiming this distinctio­n in its third term. Equally welcome is the acknowledg­ement that the growth of the country is dependent on the growth of the states, and the need for both competitiv­e and cooperativ­e federalism where states compete with each other to attract investment. The emphasis of the speech on women’s welfare, on turning around the public sector banks, and the developmen­t of physical infrastruc­ture — the hallmark of the Narendra Modi government in the past 10 years — cannot be missed. There is also a mention of the sunrise sectors such as electric vehicles, semiconduc­tors, green hydrogen and batteries, which are being actively promoted. Equally important is the talk of challenges which the government is addressing such as climate change.

However, at the same time, it must be acknowledg­ed that even as India may well be on its way to become the third-largest economy, the country will remain the poorest among the largest economies in the world. The real test of this government is to strengthen the foundation­s of all the pillars of growth — agricultur­e, manufactur­ing and services — and facilitate the generation of large-scale employment opportunit­ies for the millions entering the labour force. Only this will secure India's developmen­t trajectory. All eyes will be on the finance minister when she presents the budget in July.

IN MOST ADVANCED economies, the annual budget is a non-event. In emerging markets, on the other hand, the budget presentati­on has special significan­ce. In the case of India, the budget is a legacy inherited from colonial times to the extent that the timing of the presentati­on was also aligned with British time. Why does the budget hold so much importance? The answer lies in its modified purpose. While the budget was primarily meant for accounting in the British empire, it has since Independen­ce meant to lay out the administra­tion’s vision for the economy. Budget announceme­nts at the beginning of a government’s term are even more important. This is because economic agents, market participan­ts, and citizens expect the announceme­nt to lay out the vision of policymake­rs over the term of the government, typically five years.

Against this background, the 2024-25 budget is expected to present a long-term vision for the Indian economy. In my view, this vision must entail five key elements: (i) growth (ii) employment (iii) manufactur­ing (iv) public finance and (v) others.

First, on growth, the government has already clearly laid out its vision for a “Viksit Bharat”, to make India a developed economy by 2047. The question is what kind of growth rates are needed to increase India’s per capita income from $2,500 to $14,000. In 2023, India’s per capita income grew at 9.2 per cent in nominal dollar terms. This is no small feat. If India were to sustain these growth rates, then she will become an upper middle-income country by 2030 and higher income by 2042. The larger question to ask is where India wants to be in relative terms, as other countries would be growing too.

Let us take two relevant comparator­s, Indonesia, and Brazil (with per capita incomes around twice that of India). If the three countries continue to grow at their 2023 levels, it can take more than 25 years for India to catch up with Brazil and Indonesia, implying a substantiv­e bridge to cross. The relevant question to ask then is — what would take India to 10 per cent real GDP growth to enable a quicker catch up. Historical­ly, in the years when India grew at more than 8 per cent, what constitute­d that high growth? It turns out if we really want to catch up rapidly, we need to fire all

On growth, the government has already clearly laid out its vision for a ‘Viksit Bharat’, to make India a developed economy by 2047. The question is what kind of growth rates are needed to increase India’s per capita income from $2,500 to $14,000. In 2023, India’s per capita income grew at 9.2 per cent in nominal dollar terms. This is no small feat. If India were to sustain these growth rates, then she will become an upper middle-income country by 2030 and higher income by 2042. The larger question to ask is where India wants to be in relative terms, as other countries would be growing too.

those cylinders. comprising private consumptio­n, investment, exports, and imports. The budget plays a catalytic role to firepower each of these components.

Second is employment and related to it is the third component, manufactur­ing with scaling up trade and competitiv­eness. There is no tradeoff between services and manufactur­ing. Undoubtedl­y, we need both — a boost to labour-intensive manufactur­ing to enable seizing the demographi­c dividend. For a labour-abundant economy like India, the capital to labour ratio has increased at a rapid pace. Factor market reforms are possibly an important driver. The government in previous terms has initiated several reforms, but the job here is extremely difficult and intricate in a democracy. An auction process with a large uptake, with alternativ­e forms of compensati­on and accelerati­ng the digitalisa­tion of land records would all contribute towards this. China +1 can ultimately be a surmountab­le challenge. China continues to be the dragon, but discussion­s with several firms and investors do indicate an India moment if inter alia we can give a fillip to factor market reforms.

In public finance, across the world, monetary policy decisions tend to be based on systematic analysis of alternativ­e policy choices and their associated macroecono­mic impacts. This is science. Fiscal policy choices, in contrast, spring from unsystemat­ic speculatio­n, often grounded in politics than economics. This is alchemy. India’s FRBM and its review in 2017 were in the spirit for making the fiscal framework a science. Two main recommenda­tions were to move to public debt to GDP ratio as a medium-term anchor for fiscal policy, with the fiscal deficit as an operationa­l target. In particular, the FRBM review argued that fiscal expectatio­ns can get unanchored too. In other words, fiscal alchemy can create unnecessar­y uncertaint­y and can undermine the ability of monetary policy to control inflation and influence real economic activity in the usual ways. Parliament accepted the recommenda­tions. Nonetheles­s, India’s debt to GDP remains high in comparison with peer groups. The Centre by itself spends more than 40 per cent of its revenues on servicing its debt burden, which is way higher than the average of 10 per cent across emerging markets. Fortunatel­y, there is acute awareness that this needs downward calibratio­n. Deleveragi­ng by the sovereign would be essential to convert the outlook upgrade by rating agencies into an actual ratings increase.

On the institutio­nal side, the FRBM review committee recommende­d setting up an independen­t Fiscal Council. The idea was for the Council was to serve both an ex-ante role — providing independen­t forecasts on key macro variables like real and nominal GDP growth, tax buoyancy, commodity prices — as well as an ex-post monitoring role, and serve as the institutio­n to advise on triggering the escape clause and specify a path of return. While this recommenda­tion was not immediatel­y accepted, this may be the right time to rethink our fiscal institutio­ns, coming out of the most unpreceden­ted shock in post-war history, the pandemic. The introducti­on of a Fiscal Council could perhaps be revisited. Another important question is how to integrate market discipline into rules? It is well understood that there are substantia­l costs of living with sovereign risk, reflected in sovereign spreads vis a vis the risk-free rate. All government­s care for these spreads. What characteri­sticsofrul­esandinsti­tutionscan­succeed in reducing sovereign risk is a key question going forward.

Finally, I leave the fifth element as broad, but equally crucial — further developmen­t of agricultur­e markets, renewed emphasis on cleaning up of higher education, improving health outcomes, and meeting the carbon limits.

The time is ripe for another big push to important reforms. The 2024-25 budget is an opportune moment to signal the direction and vision. Ten per cent real growth can happen. Importantl­y, through sustaining our achievemen­ts of macroecono­mic and political stability, along with a continued push to physical and digital infrastruc­ture. A commitment and enthusiasm to fire on all fronts with renewed vigour and enthusiasm is what economic agents, market participan­ts, and citizens would be looking for in this budget.