Sushma Ramachandran

Geopolitical tensions seem to be the greatest threat to faster economic growth right now. This is a reality confronting Finance Minister Nirmala Sitharaman as she formulates the interim budget proposals for 2024-25. Even though the budget will remain valid only till a new government assumes power after general elections in the coming months, it will certainly seek to project a longer-term perspective. While doing so, the budgetary estimates will have to keep the impact of global developments in mind.

This becomes all the more important as the conflict intensifies in the Red Sea with the U.S. and U.K. making reprisals against the depredations of the Yemen-based Houthi rebels on global shipping. Iran’s drone attacks on Pakistan and the response have created more geopolitical fissures. Currently, India is the fastest-growing major economy in the world, but it could run into trouble if the situation in West Asia worsens in the coming months.

The presentation of the interim budget is also likely to take into account the prospect of the ruling National Democratic Alliance coming back to power. The expectation of its return has been buttressed by surveys indicating that it will make a comeback, though there are few certainties in the political arena. In this backdrop, it is clear that Sitharaman will seek to put in place policies that will remain relevant for the entire financial year.

On the plus side, the budget will be presented in the context of data from the National Statistical Organisation (NSO) which shows GDP growth in the second quarter of the current fiscal (July - September 2023) rose to 7.6 percent, following 7.8 percent in the first quarter. This is much higher than earlier projections, giving rise to assumptions that 2023-24 will end with 7 percent growth rather than 6.5 percent as earlier estimated.

The positive projections for the year have also raised hopes that the fiscal deficit target of 5.9 percent will be met. These have been supported by buoyant revenue collections as Goods and Service Tax (GST) inflows have consistently remained over Rs. 1.6 lakh crores for most of the year. December data shows GST collections have touched Rs. 1.65 lakh crores, still a healthy level though this is lower than the previous three months.

Similarly, corporate tax and income tax collections have been robust over the past year, growing at the rate of over 18 percent for the former and even higher for the latter segment. Disinvestment receipts continue to disappoint with only one-fourth of the target having been met but this is expected to be offset by robust tax revenue inflows.

While this is all to the good, expenditure needs will also be expanding in 2024-25. The current financial year had seen a rise of 30 percent in capex largely for infrastructure projects in the road and railways sectors. An increase in capex will have to be substantial yet again next year to push up demand and create more jobs. The latter has been an area of concern with the unemployment rate at 8.3 percent in 2023, according to the Centre for Monitoring Indian Economy (CMIE).

Subsidies are another heavy burden, especially for food grains and fertilisers. The decision to provide free food grains to those at the bottom of the pyramid will make the subsidy bill much larger in the next fiscal. Fertiliser subsidy, on the other hand, may not rise much given that world prices have stabilised in recent months.

The one development that could upset the apple cart on the expenditure front is volatility in global oil markets. Prices of the Brent benchmark crude have risen to 80 dollars per barrel after the latest attacks by Houthi rebels on merchant ships passing through the Red Sea. In case the conflict expands, bringing more countries into the fray, it could lead to a steep rise in oil prices. This, in turn, could raise the cost of oil imports and widen the current account deficit which is currently at a manageable level of one percent of GDP.

Another worry is exports. These have slowed down by about six percent in the first nine months of the current financial year. This is due to continuing recessionary conditions in key markets of the Eurozone and the U.S. Here again the strife in the Red Sea will have an impact as it has the potential to push up costs of goods moving through this route. It could make exports more expensive and uncompetitive while adding to the landed cost of imported goods.

It is thus largely the external environment that is casting a long shadow over the interim budget. There are, however, concerns on the domestic front as well. These include the slow pace of rural consumption that continues to lag behind the recovery in urban areas. Output of agriculture and related areas has also moderated compared to last year.

What must equally be recognised is that seven percent growth is not good enough for an emerging economy like India though it may be faster than the rest of the world. If the country is to achieve the target of full development by 2047, it needs to move onto a higher growth path of eight to nine percent annually. Increasing the pace of development is thus the real task facing the Finance Minister. The big hurdles in attaining this goal currently are global headwinds, over which she has little control.