Govt finances pose fresh fiscal challenges for forthcoming Budget
The Centre’s finances for 2023-24 have got better. Not only is the fiscal deficit for last year is now estimated at 5.6 per cent, lower than the Budget estimate of 5.9 per cent of gross domestic product (GDP), its total receipts, net revenue collections and non-tax revenues have improved over what was projected earlier. Similarly, the expenditure is lower by over 1 per cent, because of which the fiscal deficit figure has come down. This, however, poses some challenges for the forthcoming Budget for 2024-25 to be presented by the new government in July. The government had projected a fiscal deficit target of 4.5 per cent to be achieved by 2025-26. Now, with 5.6 per cent already achieved in 2023-24, legitimate questions would be raised on whether the government should revisit the 2025-26 target and aim for a lower number than 4.5 per cent. In any case, the original target for fiscal deficit was around 3 per cent and the debt as per cent of GDP was to be 40 per cent. The Centre is nowhere near meeting any of those targets. Hence, the opportunity of a lower deficit in 2023-24 could be used to bring out a new trajectory for fiscal correction that helps in improving the debt profile as well. The dilemma will arise on whether the Centre should continue to allocate more money for capital expenditure as it has been doing in the last few years. With the private sector expected to improve its investments, the government could use the opportunity of a higher transfer of surplus from the Reserve Bank of India, to expedite the pace of fiscal consolidation. There are, however, questions on whether the private sector will indeed be able to increase its investments and the government can afford to relax spending more for infrastructure investment. An answer to these questions will become available in July when the new government presents its first Budget.
New ministerial portfolios show continuity, but also raises hopes
There are no major surprises in the allocation of key economic ministries in the Modi government in its third term. The main economic team of ministers broadly remains the same. The finance ministry has always been one of the most keenly watched portfolios. But Prime Minister Narendra Modi has sprung no surprise as he has retained Nirmala Sitharaman in the portfolio of finance and corporate affairs. There are no changes in other important portfolios of defence, home and cooperation, road transport and highways, external affairs, commerce and industry, education and petroleum, where Rajnath Singh, Amit Shah, Nitin Gadkari, S Jaishankar, Piyush Goyal, Dharmendra Pradhan and Hardeep Puri have been retained, respectively. Importantly, Ashwini Vaishnaw has been given the additional responsibility of information and broadcasting, in addition to his existing portfolios of railways and electronics. But he has to part with the communications ministry, which is now entrusted with Jyotiraditya Scindia. The key portfolio of agriculture and rural development has been handed over to Shivraj Singh Chouhan, former chief minister of Madhya Pradesh. Similarly, the portfolio for panchayati raj has gone to a member of an alliance partner, Janata Dal (United), Rajiv Ranjan Singh. Chouhan and Singh hold the key to whether the Modi government in its third term will renew its bid to bring about farm sector reforms or how it plans to fulfil its promise of imparting greater fiscal autonomy to the panchayati raj institutions. Of course, all eyes will remain focused on the Nirmala Sitharaman who as the finance minister will present in July her sixth consecutive Budget for the Centre.
RBI monetary policy stance brings out growing differences
The six-member monetary policy committee of the Reserve Bank of India (RBI) decided on June 7 to keep the policy repo rate unchanged for yet another time. The last time the committee had changed the repo rate was in February 2023. The repo rate is the interest rate at which commercial banks can borrow money from the RBI against securities. The committee also maintained the stance of withdrawal of accommodation, even as it revised the Indian economy’s growth forecast for 2024-25 higher to 7.2 per cent against the earlier estimate of 7 per cent. Retail inflation for 2024-25 was projected at 4.5 per cent, half a percentage point higher than the government-mandated inflation target. RBI Governor Shaktikanta Das summed up his assessment of the economy and his justification for maintaining the rates at the current level in the following words: “Inflation continues to moderate, mainly driven by the core component…Food inflation, however, remains elevated…We are on the right track, but there is still work to be done”. The Governor reiterated that with growth holding firm, monetary policy will have greater elbow room to pursue price stability to ensure that inflation remained aligned with the target on a durable basis. Experts tracking monetary policy expressed no surprise over the decision of the RBI monetary policy committee but noted that the earliest rate cut could not take place before the October-December quarter of 2024 and the extent of the rate cut was to be shallow at just about half a percentage point spread over the first quarter of 2025. There was, however, some surprise over the difference of perception on a rate cut among members of the committee. Till the last meeting, held in April 2024, there was only one member of the committee, Jayanth R. Varma, who would consistently vote for a change in the repo rate and in the monetary policy stance. But in June 2024, another external member of the committee, Ashima Goyal voted for a rate cut of 25 basis points and a change in the policy’s stance to neutral. The other four members of the committee had voted in favour of maintaining the rate and stance. Significantly, all the internal members of the committee cited food inflation risks while justifying their stand on maintaining the status quo. They also argued that the last mile of disinflation had been slow. The widening differences among the members of the committee are also an indication of an impending change in stance and a rate cut.
IIP growth moderates and retail inflation brings relief
June brought some relief on the retail inflation front. The May 20224 data for the Consumer Price Index, which measures retail inflation, pegged it at a 12-month low of 4.75 per cent. This was largely due to a softening of core and fuel inflation, even as food inflation remained elevated at 8.69 per cent in May, staying at around the same level as in April. The risks of food inflation were higher even though there was an expectation of a normal monsoon. The continuing heat wave has heightened the risks on food inflation. There was also an incremental risk to inflation from the rise in global commodity prices, particularly metals, whose global prices have risen by 9.3 per cent since March. India’s industrial growth in April also moderated to 5 per cent, compared to 5.4 per cent recorded in March 2024. The moderation in industrial growth was attributed to the manufacturing sector, whose growth decelerated to 3.9 percent in April, down significantly from 5.76 per cent in the previous month. The tepid performance of the manufacturing sector neutralized the positive performance of electricity and mining, whose growth in April accelerated to 10.2 per cent and 6.7 per cent, respectively. Worryingly, output contraction was recorded in as many as six out of the 23 manufacturing sectors, tracked by the Index of Industrial Production or IIP. The growth in both capital goods and intermediate goods decelerated to 3.1 per cent and 3.2 per cent, respectively, in April, while primary goods, infrastructure goods and consumer durables industry reported accelerated growth at 7 per cent, 8 per cent and 9.8 per cent, respectively. There was, however, concern over the contraction of 2.4 per cent in the output of consumer non-durables sector. The state of industrial output reflects the uneven growth in demand in the economy.
GDP growth for 2023-24 offers positive surprise
The National Statistical Office surprised most analysts on May 31, 2024, when it announced that India’s gross domestic product (GDP) in 2023-24 grew by 8.2 per cent. This was its provisional estimate, buoyed by a 7.8 per cent growth rate reported for the fourth quarter of last year. The first advance estimates in January 2024 had placed the growth rate at 7.3 per cent, the second advance estimates, released a month and a half later, estimated it at 7.6 per cent and three months later, it is now at 8.2 per cent. For the full year of 2023-24, a GDP growth rate of 8.2 per cent meant that it was only the ninth time in the last 62 years that economic growth has crossed the 8 per cent mark. In these 62 years, the Indian economy grew by over 9 per cent only thrice – in 1975-76 (the Emergency year), 1988-89 (the last year of the Rajiv Gandhi government where growth was fuelled through huge borrowing) and 2021-22 (the year of the post-Covid recovery after a contraction of 5.8 per cent in 2020-21). The growth rate for 2023-24 also meant that the ten years of the Modi government recorded an average growth rate of 6 per cent, despite dealing with the disruptions caused by demonetisation, the launch of the goods and services tax and Covid. The preceding ten years of the Manmohan Singh government saw an average GDP growth rate of 6.8 per cent, even though it had to deal with the global financial crisis. A closer look at the 2023-24 numbers reveals that the manufacturing sector and the construction sector pushed up the growth rate with a print of close to 10 per cent for each of them. While government-led investments kept the investment rate up, private consumption continued to show weakness. A one percentage point difference between gross value added (GVA) growth at 7.2 per cent and GDP growth at 8.2 per cent implied that the overall buoyancy in the economy was fuelled by a reduction in subsidies and higher net tax collections. The long-term challenge of reviving consumption demand and private-sector investment remains to be addressed.
New S&P rating outlook paints a rosy picture
In an unusual move, just days before the general elections were to be declared in India, S&P Global Ratings, an international rating agency, announced on May 29 that it had chosen to upgrade its outlook from “stable” to “positive”. This was the first upgrade by S&P Global Ratings for India in the last ten years and even though it came out days before the general election results, its commentary noted that it remained bullish on India irrespective of the election results. This was good news for the Indian government, whose leaders welcomed the upward revision of its outlook. Notably, the other two international rating agencies, Moody’s and Fitch, continue to maintain a “stable” outlook for India and the lowest investment grade sovereign rating for India. S&P Global Ratings also places India at the lowest investment grade sovereign rating. More interesting than the upgrade in its outlook was S&P Global Ratings’ forecast for India in the next five years. On GDP growth, it sees the growth rate to move up from 6.8 per cent in 2024-25 (the Reserve Bank of India expects the growth rate to be 7 per cent), 6.9 per cent in 2025-26 before stabilizing at 7 per cent in each of the following two years. While the unemployment rate, according to it, is expected to go down from 5.3 to 5.2 per cent in this period, the current account deficit will remain benign even as it moves up to 1.7 per cent by GDP by 2027-28 and the debt-to-GDP ratio is expected to decline from 84 per cent in 2024-25 to 81 per cent in 2027-28. The total government deficit (fiscal deficit of the Centre and states) is also forecast to come down from 7.9 per cent in 2024-25 to 6.8 per cent in 2027-28. One of the reasons for the outlook upgrade was that S&P Global Ratings expected broad continuity in economic reforms and fiscal policies in the next few years. The revised outlook has now raised prospects of a rating upgrade for India in the next two years.
High-frequency indicators present a positive outlook
Several sectors in May showed continued buoyancy in the pace of economic activities. Collections of goods and services tax (GST) in May rose 10 per cent to Rs 1.73 lakh crore. With April 2024 having mobilized a record amount of Rs 2.1 lakh crore of GST, the first two months of 2024-25 have pushed the total collections to Rs 3.83 lakh crore, a rise of 11.3 per cent. With an improvement in economic growth forecasts, the performance of GST collections is expected to get better in the coming months. Domestic passenger vehicles sales also increased in May 2024, though by a modest margin of 4.42 per cent to 3.5 lakh units. This was attributed to elections and extreme heat. Passenger vehicles sales are not expected to do well in 2024-25 because of the high base effect of last year. In 2023-24, passenger vehicle sales rose by 8 per cent to 42 lakh units. Unified Payment Interface (UPI) transactions, another high-frequency indicator of economic activities, clocked a new high in value terms in May at Rs 20.45 lakh crore, rising by 4 per cent over the previous month. The number of transactions in May was estimated at 14 billion, a rise of 6 per cent over April 2024. On a year-on-year basis, the May 2024 transactions on UPI recorded a 39 per cent rise in value and 49 per cent in volume terms.
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