Building resilience for the long game

Source– The post is based on the article “Building resilience for the long game” published in the Business Standard on 25th January 2023.

Syllabus: GS3- Indian economy and mobilisation of resources

Relevance– Issues related to fiscal policy

News-The article explains the economic scenario around the world and for India. It also provides some suggestions for the upcoming budget.

What is the expected economic scenario for FY2024 around the world and for India?

2023 is likely to be a year of global economic slowdown. The impact of synchronised and aggressive monetary policy tightening cycles will be felt.

Mild recession in both the US and Europe is expected.

This will affect India’s growth via weak exports and delayed private investment.

India’s real GDP growth can be below the estimated level.

Nominal GDP growth is likely to be slow due to moderation in commodity price. Tax buoyancy is highly sensitive to nominal GPP. It means that a moderation in tax buoyancy is expected in FY24.

What should be the focus of the coming budget?

The budget should focus on fiscal consolidation. The central government’s fiscal deficit of around 6.5 per cent of GDP.

Public infrastructure spending should be increased, but without compromising on consolidation.

It should be done by using money created by the reduction in food and fertiliser subsidy bills, and other revenue-raising mechanisms such as asset monetisation.

There is a need to rationalise personal income taxes so that more individuals opt for the new regime of lower taxes and fewer exemptions.

But a broader reduction in the effective tax rate will add to the government’s fiscal burden, without boosting consumption. A more targeted support for lower income households, may be more worthwhile.

From a medium-term perspective, it should aim for creating more jobs by boosting the manufacturing sector. There is a need to steer away from protectionist measures such as Custom duty hikes.

More focus on skill development to empower the youth, increased agriculture investments to boost farm productivity, and using digital infrastructure to find and connect new markets.

In the long term, there will be high energy demand. So, it is essential that this increased energy comes with minimum environmental impact.

India needs to be green first, rather than transition to green later. This requires investments in renewables, green technology and large-scale afforestation.

Agriculture and food security depend on access to a consistent supply of fresh water. Investments are required to ensure water availability across the country.

There is a need to create stronger counter-cyclical fiscal buffers. Setting aside a small percentage of revenues every year, will enable us to smooth out the fiscal deficit over the years.