GDP growth number could bring more cheer to economy
The second advance estimates (SAE) of India’s gross domestic product (GDP) in 2023-24 were released on the last day of February and the numbers there provided an unexpected and remarkable boost to sentiments about the Indian economy. These estimates showed that the economy’s size this year grew by 7.6 per cent in real terms, compared to the first advance estimates (FAE) of 7.3 per cent, which were released just about eight weeks ago. The SAE numbers for the current year’s GDP growth were driven by many factors. One, the GDP for the third quarter of the current year grew by 8.4 per cent, on top of each of the previous two quarters also growing by over 8 per cent. The third-quarter numbers were also remarkable for the contraction in output of agriculture and allied sectors, even as the government’s capital expenditure push supported healthy investment growth, while private consumption continued to show weakness. Two, the third quarter growth was buoyed by high tax collections and a tight check on subsidies expenditure. Thus, net indirect tax collections (indirect tax collections minus subsidies) rose by a six-quarter high of 32 per cent. Three, since the GDP growth in the third quarter was boosted by net indirect tax collections, the gross value added (GVA) growth in the October-December quarter of 2023 was estimated at only 6.5 per cent, underlining how the GDP growth of 8.4 per cent was mainly due to the government’s tax collection and subsidies control efforts. Four, the higher growth number in 2023-24 was also due to a sharp downward revision in the number for 2022-23. As a result, the GDP growth number for 2022-23 was scaled down to 7 per cent, against 7.2 per cent, measured earlier. The downward revision for 2022-23 number resulted from an upward revision for 2021-22 GDP growth number, which was now estimated at 9.7 per cent, instead of the earlier 9.1 per cent. The big question that is now being debated is whether the fourth quarter GDP number for 2023-24 will be able to achieve the optimum growth of 5.9 per cent or will exceed that. If it does, expect a further upward revision in the GDP growth number for 2023-24.
Retail and wholesale inflation down, but food prices rise
There was some relief for the economy on the inflation front. Inflation based on the Wholesale Price Index (WPI) eased to 0.27 per cent for January 2024, the lowest number in the last three years. A month earlier, the WPI-based inflation rate was 0.73 per cent. More importantly, the food segment under WPI showed a deceleration in the inflation rate to 3.79 per cent in January 2024, compared to 5.39 per cent in December 2023. The deceleration in WPI-based inflation was driven by manufactured products, followed by fuel and power. On the retail inflation front also, the Consumer Price Index for January 2024 decelerated to a three-month low of 5.1 per cent, even though it was well above the mandated target of 4 per cent. Retail inflation in December 2023 was higher at 5.69 per cent and a year ago in January 2023, it was even higher at 6.52 per cent. The sense of relief comes also from the trajectory of retail inflation. The decline in the retail inflation rate in January 2024 was largely due to a moderation in prices of cereals, milk, and fruit. The CPI-based inflation for food items was down to 8.3 per cent, compared to over 9 per cent in December 2023. A cause for concern was the trajectory in prices of vegetables, pulses, and spices, which continued to experience double-digit inflation. Even prices of meat and eggs saw a slight acceleration. The marginal deceleration in the overall retail inflation was due to month-on-month easing of prices, particularly in the food basket. Not surprisingly, the Reserve Bank of India’s Monetary Policy Committee, which announced its bi-monthly review a week earlier, had kept the repo rate unchanged and made no alteration to its accommodative stance.
Exports of goods and services up, overall trade deficit down
Growth in exports of merchandise goods picked up in January by notching up a three-month high of 3.2 per cent to $36.92 billion. But imports grew faster than exports at 4.2 per cent to $54.41 billion in January 2024, because of which, India’s merchandise trade deficit rose to $17.49 billion, compared to $16.03 billion reported in December 2023. Exports grew despite problems on the Red Sea, a major shipping route accounting for 30 per cent of the global container traffic and 12 per cent of global trade, subdued demand in developed economies and falling prices of commodities. The government took credit for the rise in merchandise goods exports despite the Red Sea crisis as it suggested to the banks to extend necessary credit support to exports. On a cumulative basis, India’s merchandise exports continued to languish with a contraction of 4.9 per cent at $352 billion for the April-January period of 2023-24, even as imports declined by 6.7 per cent to $561 billion, thereby reining in the overall goods trade deficit. Worryingly, exports growth in January 2024 was fuelled largely by petroleum and gems and jewellery sectors, as exports without these items grew at a lower rate of 2.5 per cent. Causing concern was also the fact that non-petroleum and non-gems and jewellery imports declined at an even higher rate of 5.2 per cent in January, indicating that broad-based demand is still muted. Services exports, however, grew by 17 per cent to $32.8 billion in January 2024, according to provisional data. Services imports, on the other hand, rose by a lower rate of 8.3 per cent to $16.05 billion, showing a services surplus of $16.75 billion. On a cumulative basis, services exports during April-January 2023-24 were estimated at $284 billion, showing a rise of six per cent. Services imports however fell by 1.7 per cent to $148 billion. Overall trade deficit (including goods and services) thus declined to $70 billion in the first ten months of the current year, compared to $112 billion in the same period of 2022-23.
NDA pats itself on the back with its White Paper
Fulfilling the promise made by Finance Minister Nirmala Sitharaman in her Interim Budget address, the Union finance ministry on February 8 tabled in Parliament a White Paper on the Indian economy. Essentially, the White Paper sought to highlight the broad economic policy trajectory followed by the Narendra Modi government in the last ten years and compared that with the previous ten years of the rule under Manmohan Singh as prime minister. It brought out how the Modi government followed a counter-cyclical fiscal policy to contain the Budget size during the peak cycle of economic growth to create necessary fiscal space to manage adverse situations. In contrast, the United Progressive Alliance (UPA) government of Manmohan Singh followed a pro-cyclical fiscal policy by expanding its Budget size during a period of relatively high growth. The White Paper concluded that this had led the economy to a “fiscal precipice”. Understandably, the Modi government’s White Paper highlighted what it believed to be the UPA’s “economic mismanagement, financial indiscipline and widespread corruption” during its ten-year reign at the Centre. At the same time, the 54-page document asserted how the NDA government’s prudent fiscal policy had helped rescue the Indian economy from being among the “fragile five” countries to emerging as one of the top five economies of the world. It also pointed out that despite a big fiscal stimulus in 2020-21 in the wake of the Covid pandemic, the Modi government kept a tight leash on India’s fiscal situation. The White Paper showed how the Modi government’s ten years saw the compound annual average growth rate (CAGR) of revenue expenditure declining to 9.9 per cent, compared to 14.2 per cent during the Manmohan Singh years, while the CAGR for capital expenditure was 17.6 per cent and 5.6 per cent, respectively, for the same period. While the tax devolution and grants to the states, as recommended by the Finance Commissions amounted to 3.36 per cent of GDP during the UPA years, that share went up to 4.24 per cent in the NDA tenure of 10 years. The document also took credit for creating a robust digital public infrastructure through an efficient payments system among other things.
RBI avoids a rate cut; stays firm to bring inflation down to 4 %
On the same day as the government presented its White Paper on the Indian economy, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to maintain the status quo on the repo rate, which is the interest rate that the apex bank charges on its loans to banks against approved securities. Its policy, unveiled on February 8, retained the repo rate at 6.5 per cent while maintaining an accommodative stance. An interesting feature of the MPC meeting was that its decision on maintaining the status quo was not unanimous. One of its members, Jayanth Varma, voted in favour of a rate cut by 25 basis points and had wanted the monetary policy stance to be changed to neutral. What might have tilted the view against a rate cut was the categorical stance of the RBI Governor Shaktikanta Das, who said: “The uncertainties in food prices…continue to impinge on the headline inflation trajectory…Inflation has seen a significant moderation from the highs of the summer of 2022…That said, the job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far…Stable and low inflation at 4 per cent will provide the necessary bedrock for sustainable economic growth.” The Governor also added that the central bank should ensure successful navigation of the last mile of disinflation. What obviously became the spoilsport for those who were expecting a rate cut was the RBI’s inflation projection. Inflation for 2024-25 was projected at 4.5 per cent, while for the first quarter of the coming financial year, retail inflation was expected to be 5 per cent, falling to 4 per cent only in the July-September quarter of 2024. The government’s legal mandate for the RBI is to keep retail inflation at 4 per cent. The imperative of keeping inflation under control in the run up to the general elections also could not have been lost sight of by those in charge of monetary policy.
Six takeaways from an unusual Interim Budget
On February 1, 2024, the Narendra Modi government presented the Interim Budget for 2024-25. It was an Interim Budget because the 2024 general elections are scheduled to be held in the months of April and May. A government elected for a five-year term usually presents only five full Budgets and the sixth Budget is an Interim Budget, which is a vote-on-account, and it essentially secures Parliament’s approval for expenditure to be incurred during a limited period till a duly elected government is in place and can present a full Budget. Hence, usually, no tax proposals are unveiled in an Interim Budget. Nor does the finance minister announce any major schemes or projects with an expenditure outlay. However, expectations of some taxation changes or announcements of some new projects were high, largely because five years ago, the Modi government’s Interim Budget for 2019-20, presented before the 2019 general elections, was different. It had then famously announced the PM Kisan scheme to transfer Rs 6000 to each farmer in a year and had introduced a rebate to make individuals’ annual income of up to Rs 5 lakh tax-free. Both the moves were aimed at wooing the voters who would exercise their franchise a few months later. Understandably, therefore, there were expectations of Finance Minister Nirmala Sitharaman also announcing some tax reliefs and big schemes in her Interim Budget. But a few weeks before February 1, 2024, Ms Sitharaman had told industry leaders that they should not expect any spectacular announcements in the Interim Budget. Indeed, the Interim Budget for 2024-25 that was eventually presented had no taxation measures and shied away from announcing any major populist schemes to woo voters. It could be argued that there was less pressure on the finance minister to announce such reliefs because the Modi government had already unveiled similar schemes like the launch of the free food grain facility for 810 million beneficiaries for five years and the political mood in the country had swung in favour of the ruling party in the wake of the results of the recent state Assembly elections in December 2023. Nevertheless, Ms Sitharaman’s decision to eschew any tax relief or major populist schemes or projects from her Interim Budget on February 1 was a welcome development from fiscal governance point of view. What’s more, Ms Sitharaman’s Interim Budget had at least three more positive features. One, she stuck to a path of steady fiscal consolidation. Not only did she reduce the government’s fiscal deficit for 2023-24 from the Budget Estimate of 5.9 per cent of gross domestic product (GDP) to 5.8 per cent, her projection for 2024-25 at 5.1 per cent of GDP was testimony to the Modi government’s resolve to bring the deficit to the targeted 4.5 per cent by 2025-26. What’s more, she brought down the government’s revenue deficit from 3.9 per cent in 2022-23 to 2.8 per cent of GDP in 2023-24. For 2024-25, the revenue deficit target was lower at 2 per cent, indicating the government’s commitment to fiscal prudence. Along with such prudence, Ms Sitharaman left nobody in doubt about her resolve to persist with the practice of transparent budgeting, as there was no further recourse to extra-budgetary resources. Two, the Budget continued push for more capital expenditure by the government to prop up investment demand in the economy to sustain growth and at the same time bridge the infrastructure deficit constraining the pace of economic activity. Having already grown the government’s capital expenditure by 28 per cent to Rs 9.5 lakh crore in 2023-24, the finance minister proposed to increase it again by 17 per cent to Rs 11.11 lakh crore in 2024-25. Three, the Interim Budget displayed a conservative approach in both its revenue and expenditure projections. It stayed away from setting an ambitious disinvestment target for 2024-25, after experiencing a 40 per cent shortfall in its target for the current year. Its net tax revenue collections target for the coming year is also not very ambitious, projecting only 12 per cent growth against an increase of 11 per cent recorded in 2023-24. Even expenditure growth for 2024-25 has been reined in at 6 per cent, down from 7 per cent in the current year. Four, there is a significant deceleration in the increase in the flow of resources from the Centre to the states, by way of tax devolution and transfer of funds for various schemes. Tax devolution and central transfer of funds are set to grow by 10 per cent and 8 per cent, respectively in 2024-25, compared to a rise of 16 per cent and 15 per cent in 2023-24. Five, even while staying away from announcing new projects, the Interim Budget did unveil the contours of two new schemes – over 10 million taxpayers were given the benefit of settling their tax disputes (a move that would result in financial gain for the middle-class and create a feel-good factor) and the launch of a new innovation fund with a corpus of Rs 1 lakh crore, aimed at encouraging research and development in the private sector. Finally, the Interim Budget had two areas of concerns. The Centre’s total debt continued to rule at an uncomfortably high level of 58.1 per cent of GDP in 2023-24 and would decline only marginally to 57.2 per cent next year. This is much higher than 40 per cent of GDP, a target set by the last official committee on fiscal consolidation. Similarly, the financial allocations for defence saw hardly any increase and there appears to be under-provisioning of subsidies for food, fertiliser and even petroleum. But overall, Ms Sitharaman’s first Interim Budget not only departed from the unhealthy practice of using it for electoral populism, but also ensured that electoral compulsions did not damage government finances.
More regulatory action likely against PayTM Payments Bank
The presentation of the Interim Budget on February 1 almost coincided with a crackdown by the regulator, the Reserve Bank of India (RBI), on the operations of one of the country’s largest payment banks – Paytm Payments Bank Limited (PPBL). On January 31, the RBI imposed curbs on PPBL prohibiting it from operating its mobile wallet after February 29, a deadline that was later extended to the middle of March 2024. PPBL was also prohibited from taking fresh deposits or undertaking credit transactions or top-ups in any customer accounts, prepaid instruments, wallets, FASTags or National Common Mobility cards. PPBL is an associated company of PayTM. When the RBI’s prohibitory orders were issued, it had over 100 million customers, whose identity is claimed to have been verified, in addition to having 300 million wallet users, 30 million bank account holders and a 17 per cent market share in FASTag by value. The January 31 orders were preceded by an earlier order barring PPBL from on-boarding new customers. These developments brought under the scanner the governance standards followed in fintech companies and the role of the regulator. The finance ministry also held high-level internal meetings to monitor the situation and discussed with the financial-sector regulators the ramifications and measures to prevent the recurrence of such governance failures in fintech companies. The board of One97 Communications Ltd (OCL), the parent company of PPBL, decided to set up a three-member group advisory committee to strengthen its corporate governance standards. The possibility of the regulator cancelling the banking licence granted to PPBL or facilitating the takeover of its business by another financial-sector entity cannot be ruled out.
Govt bullish on PLI, though investments pace slows
At the start of the financial year of 2020-21, the Modi government announced an outlay of Rs 1.97 lakh crore for a scheme that was aimed at creating national manufacturing champions by providing a range of financial incentives (mostly equivalent to 3 to 6 per cent of the incremental sales achieved on new investments) to generate six million new jobs and an additional output of Rs 30 lakh crore in the following five years. The programme – Production Linked Incentive (PLI) Scheme, was to be launched and monitored by individual ministries of the Union government. The associated goals of the PLI Scheme were to improve the cost competitiveness of locally produced goods, create employment opportunities, curb cheap imports, and boost exports. Initially, the PLI Scheme covered only three sectors – Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs), to be monitored by the Department of Pharmaceuticals; Large Scale Electronics Manufacturing, to be monitored by the Ministry of Electronics and Information Technology; and Manufacturing of Medical Devices, to be monitored by the Department of Pharmaceuticals. In November 2020, ten more areas were covered under the PLI scheme and these along with the ministries assigned to monitor them were: Electronic/Technology Products under the Ministry of Electronics and Information Technology; Pharmaceuticals drugs under the Department of Pharmaceuticals; Telecom & Networking Products under the Department of Telecommunications; Food Products under the Ministry of Food Processing Industries; White Goods (ACs & LED) under the Department for Promotion of Industry and Internal Trade; High-Efficiency Solar PV Modules under the Ministry of New and Renewable Energy; Automobiles & Auto Components under the Department of Heavy Industry; Advance Chemistry Cell (ACC) Battery under the Department of Heavy Industry; Textile Products: MMF segment and technical textiles under the Ministry of Textiles and ; Specialty Steel under the Ministry of Steel. In September 2021, the PLI Scheme was extended to cover Drones and Drone Components, to be monitored by the Ministry of Civil Aviation.
By the end of June 2023, 733 applications were approved in 14 Sectors with an expected investment of Rs 3.65 lakh crore. An estimated 176 micro small and medium enterprises (MSMEs) were are among the PLI beneficiaries in sectors such as bulk drugs, medical devices, pharma, telecom, white goods, food processing, textiles and drones. According to an assessment made in February 2024, the picture of how the PLI schemes have fared so far was mixed. There were early signs of a slowing in the execution of the PLI schemes. A review report of an inter-ministerial committee showed that investment growth was “significantly slow” in textiles, information technology hardware and speciality steel during 2023-24. The progress was reported to be slow even in sectors such as medical devices, automobile and auto components, ACC batteries and white goods. Only the PLI Schemes for mobile phones, bulk drugs, pharmaceuticals, telecom, drones and food processing were on track to achieve or exceed the targets for investments, job creation and production. Against an expected investment of Rs 49,682 crore in the 14 identified sectors during 2023-24, about Rs 30,695 crore, or 62 per cent, of investment had been made in the first three quarters of the current year. Until the end of March 2023, a total investment of Rs 75,917 crore had been invested under all the 14 PLI Schemes. This was a little higher than the target of Rs 60,345 crore. The higher investment led to production valued at Rs 5.96 lakh crore and generated 3.67 lakh direct jobs against the target of Rs 5.78 lakh crore of production and 2.54 lakh jobs. On a cumulative basis, the PLI Scheme has so far led to additional investment worth Rs 1.03 lakh crore and resulted in exports of over Rs 3.2 lakh crore, according to the government review report. Such investment has also led to production worth Rs 8.61 lakh crore, creating direct and indirect employment for over 6.78 lakh people. The total amount of incentives allocated for the PLI Scheme was Rs 1.97 lakh crore, of which Rs 1.56 lakh crore is already committed for distribution to various companies that have made investments so far. The underutilisation is mainly on account of reduction in the allocation for some schemes, rejection of beneficiaries’ claims and lukewarm response received for sectors such as textiles. The government is hopeful that the utilisation of the allocations made for the PLI Scheme should see an increase in the coming years. The Interim Budget for 2024-25 saw increases in the PLI Scheme allocations for various sectors – a 36 per cent increase to Rs 6,200 crore for mobile and IT hardware, a seven times increase to Rs 3,500 crore for auto and auto components, a 26 per cent rise to Rs 2,143 crore for pharmaceuticals, a 25 per cent increase to Rs 1,444 crore for food processing and a near-four times rise to Rs 1,911 crore for telecommunication hardware. Clearly, the government is bullish on the success of the PLI Scheme.
The previous issues of Indian Economy Review are available here: LINK
Supported by
