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 percent 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 percent real GDP growth to enable a quicker catch up. Historically, in the years when India grew at more than 8 percent, what constituted that high growth? It turns out if we really want to catch up quickly, we need to fire all 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 labor-intensive manufacturing to enable seizing the demographic dividend. For a labor-abundant economy like India, the capital to labor 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. Nevertheless, India’s debt to GDP remains high in comparison with peer groups. The Center by itself spends more than 40 percent of its revenues on servicing its debt burden, which is way higher than the average of 10 percent 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 characteristics of rules and institutions can succeed 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 percent 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 vigor and enthusiasm is what economic agents, market participants, and citizens would be looking for in this budget.
The writer is former chief, Systemic Issues Division at the IMF