Prioritising stability over growth

Source– The post is based on the article “Prioritising stability over growth” published in the Business Standard on 20th January 2023.

Syllabus: GS3- Indian economy and issues relating to growth

Relevance– Issues related to fiscal policy

News– The article explains the economic outlook for India. It also provide some suggestions for the upcoming budget

What is the economic outlook for India?

Positive side– The National Statistical Office forecast a 7% gross domestic product growth for 2022-23. The threat presented by the Covid is relatively very low.

Negative side– Combined fiscal deficit of around 10%. The current account deficit projected at over 3.5%, and core inflation sticking to 6% can not be a very good sign for the economy. NSO’s forecast figures for the current year are subject to revision.

On the international front, there is uncertainty about the Russia-Ukraine conflict. Many economists are predicting an imminent global recession.

What are some suggestions for the upcoming budget?

It would be wise to have policies which favour financial and economic stability over growth aspirations in the near term. The temptation to loosen fiscal policy should be resisted at this stage.

The government should contain its revenue expenditure. The Union Budget on February 1 will be followed by state governments’ budgets. The Government of India needs to set the right example by not yielding to populist demands.

As for the capital expenditure, the increased government spending in the last few years hasn’t resulted in the desired results. It is likely to result in “crowding out” of the private sector borrowings. It will be prudent to not increase the government capital expenditure allocations for 2023-24 beyond the current year’s level.

The government should refrain from setting an unrealistic target for divestment revenue receipts.

The government shouldn’t depend on divestment proceeds to meet its revenue requirements. The government needs to prioritise corporate governance improvements in the public sector enterprises.

The Budget should announce the government’s plan to improve the IBC’s efficacy.

The government should not provide tariff duty protection to the various sectors of domestic industry without solid reasoning. Sincere efforts are needed to bring to conclude crucial free trade agreements, which have been under negotiations for several years.

The capital gains tax regime needs an overhaul. During the last few years, the capital gains tax rates have been frequently changed in an ad hoc manner. There is a  need to simplify and rationalise the existing capital gains tax framework.