Continuing the emphasis placed in the Union government’s budgetary strategy for the last fiscal year 2022-23, Union finance minister Nirmala Sitharaman has retained her focus on public investment as the driver of economic growth for the ensuing 2023-24 fiscal year. This has been widely welcomed. National income statistics show that gross fixed capital formation (GFCF) as a percentage share of gross domestic product (GDP) has been declining since 2008 from a peak of 36 per cent in 2007, touching a low of 22 per cent in 2020. This trend lies at the core of the growth challenge that the Indian economy has been facing through the two terms of the Narendra Modi government.
It is worth recalling that the average annual growth rate of the economy over the past decade has been below the 15-year average of 7.5 per cent in 2000-15. That era of high growth was preceded by a period when average annual growth rate was 3.5 per cent, from 1950 to 1980, 5.5 per cent from 1980 to 2000, touching a peak of over eight per cent in 2003-2010. By comparison, the Narendra Modi years remain unimpressive, with an average annual growth rate of just about six per cent over the past nine years, and three per cent during 2019-22.
Returning to the 7.0 to 8.0 per cent growth path is the only way in which the next decade can hope to be dubbed as “Amrit Kaal”.
Recognising that private investment was not adequately forthcoming during the government’s first term in office, former finance minister Arun Jaitley had offered some tax incentives to the private corporate sector in the hope that this would stimulate the so-called “animal spirits” of enterprises. Jaitley also took several steps to clean up the financial mess left behind after the intoxicating party of the “growth boom years” was over.
But then, first demonetisation struck the economy and then the Covid-19 lockdown. The uncertainty generated by these shocks combined to subdue demand as well as the appetite for risk within the private sector. Consequently, during the three years of 2019-22 the Indian economy recorded the lowest annual average growth rate of real GDP in decades of just around three per cent.
In February 2022 Nirmala Sitharaman had stepped forward to salvage the situation by giving up a key mantra of what economists refer to as “neo-liberalism”. The neo-liberal mantra was that public investment “crowds out” private investment. Last February, Ms Sitharaman’s speech writers rediscovered Nehruvian economics by enunciating that public investment would “kick in” private investment. India’s growth strategy in the 1950s was based on this thesis. If it was inadequate resources that constrained private investment in the 1950s, requiring public investment to step in, the 2020s saw private investment being restrained by a variety of factors, both economic and political.
Responding to what I have named as a “capital strike”, the unwillingness of the private sector to take risks and invest, Ms Sitharaman adopted the new fiscal strategy of increasing capital expenditure in the hope that this would generate demand and stimulate private investment. There has been some positive response and this has contributed to an improvement in the performance of the economy in fiscal 2022-23. However, this revival of growth has been accompanied by higher inflation.
The Russian invasion of Ukraine within weeks of the Union Budget presentation last February contributed to a further spike in prices and subdued investor sentiment. The challenge for the finance minister this year has been to dampen inflationary expectations while reviving growth expectations. This she has tried to do by reducing revenue expenditure, holding the line on fiscal deficit while promising to do more and increasing capital expenditure in the hope that this would continue to sustain higher rates of income growth. The Reserve Bank of India joined forces with a monetary policy aimed at arresting inflationary expectations.
This macro-economic balancing act has come in for much appreciation because pushing the investment cycle up in a non-inflationary manner remains the key to income, employment, demand and revenue generation.
Critics of this year’s fiscal strategy have pointed out that there has infact been little increase in total capital expenditure if the Budget’s fiscal outlay is added to the capital spending of the public sector. The increase in infrastructure spending, it has been estimated, has been balanced out by a decrease in public sector investment. This does pose a challenge to the growth of manufacturing output to the extent that much of the public sector investment has been in manufacturing.
If the increase in infrastructure investment stimulates demand for manufactured goods this could help revive that laggard sector. If not, the threat of “de-industrialisation” posed by a combination of low domestic demand and increased imports, meeting whatever demand there is, would remain.
For all its criticism of Jawaharlal Nehru, the BJP government in New Delhi has returned to Nehru’s path both on economic policy and foreign policy. Placing bets on public investment and declaring India as “the voice of the Global South” constitute a Nehruvian echo to Mr Modi’s voice.
There is no doubt merit in both. India’s ambition to be a “voice of the Global South” can only be realised if the domestic economy fires on all engines and becomes, as Prime Minister Modi ambitiously declared, “an engine of global growth”.
This requires increased investment and not just in physical infrastructure like roads and railways, but also in social infrastructure, especially education, science and technology.
Finally, how the government deals with the market shock delivered by the US-based investment research firm Hindenburg Research’s expose on Gautam Adani’s business practices will also have a medium-term impact on the “animal spirits” of enterprises and domestic and global business expectations for India’s future. It should not be forgotten that the economy paid a price in 2012-2014 on account of the “policy paralysis” that followed accusations of crony capitalism. A responsible response by the government and transparent action by regulators is essential to restoring investor confidence in public policy and the financial markets.
Merely shifting the goalposts from “achche din” to “Amrit Kaal” is unlikely to stimulate positive expectations. It is performance today that in fact fuels expectations for and about tomorrow.
