BIZ ~ COM
As India prepares for the forthcoming Union Budget, Deloitte’s pre-budget booklet focuses on its crucial role in igniting discussions on India’s growth trajectory. Deloitte India experts delve into key areas, such as technology adoption, FDI/investment, digital skill development, job creation, and initiatives to share industry-specific insights and expectations that can enhance the business environment in the country.
Despite a slowdown in the global economy and uncertainties, India’s growth outlook remains positive. The IMF recently upped its projections for India this year. We also remain optimistic about the economy this year and expect India to grow between 6.5 percent and 6.8 percent during FY2023–24 in our baseline scenario, followed by an average of 6.65 percent and 7.95 percent over the next two years as the global economy turns buoyant. India will have to rely on its own domestic demand to drive its growth, specifically, private consumption and investment spending. However, inflation could affect stability in growth. We expect higher prices over the next 1.5 years; prices are expected to remain in the upper range of the RBI’s inflation target band over the forecast period.
Confidence boosters
India grew 7.8 percent in the first quarter; a large part of this growth came from strong domestic demand even during the global economic slowdown weighed on exports. Considering Q1 GDP growth, we have revised up our growth estimate for this year; growth is expected to be 6.5–6.8 percent for FY24. The IMF also revised up India’s growth forecast to 6.3 percent for FY24. According to IMF estimates, the Indian economy will surpass Japan and Germany to be the world’s third-largest economy achieving a GDP of US$ 5 trillion by 2027. • Robust infrastructure spending: The government has been consistently increasing budgetary allocation for infrastructure. Capital expenditure is expected to grow from 22 percent in FY23, to 38.9 percent in FY24. The calibrated policy actions help improve logistics and supply chain. • Credit growth accelerating: Consistent improvement in the bank’s balance sheets over the past couple of years and the fall in NPAs across sectors have increased banks’ willingness to lend. This has helped credit growth to recover quickly after the pandemic. Credit growth is the highest in the services sector, followed by growth in personal loans and loans to the industry. • Recovering in the MSME sector: The sector is emerging out of the crisis after the pandemic; several parameters point to its steady growth. The demand for loans, for example, in the sector increased 33 percent in Q1 FY23-24, whereas delinquencies are declining as NPAs have improved across segments of MSME lenders and borrowers.
Worries
Inflation: Concerns around rising prices are at the top of mind for policymakers. High food prices, especially double-digit growth in pulses and cereals, which have a significant share in the CPI food basket, are concerning. Moreover, oil prices started trending up quickly. Food and fuel prices are likely to keep inflation high. Despite the RBI raising rates to 6.5 percent since April 2022, inflation remained above its tolerance range. • Elections: The upcoming national and key state elections in India over the next few months can create a policy pause for about three months until the new government assumes office. Policies around ensuring energy supplies, climate change, sustainable development, international trade, maritime, space and cyber-security, non-proliferation, and cross-border terrorism will be on priority for the incoming government. • Geopolitical uncertainties: Geopolitical concerns are weighing on global investors and policymakers. As the Israel and Palestine war intensifies, there are fears that the regional dispute could prolong and have a contagion impact on global supply chains and the economy. The ongoing Israel-Hamas conflict could destabilise already tense steel and oil supply chains worldwide. Crude price of US$90/bbl will put further stress on India’s current account deficit. Higher import bills and a slowdown in export growth amidst a global slowdown can push the trade deficit high. • Diverging demand gaps: Consumer spending has seen a strong revival after the pandemic in the high-income segment. Services such as travel and hospitality, and sale of high-end vehicles in the passenger vehicle segment have seen a surge, Budget expectations 6 pointing to pent-up demand amongst the top income percentile of the population. However, rural demand has not yet seen sustainable growth. Segments such as FMCG, entry-level auto segments, and two-wheelers are yet to pick up sustainably. Simultaneously, rising policy rates have put pressure on household borrowings as EMIs have gone up. Spatial and erratic monsoon has further added to stress on rural spending abilities.
Top expectations
• Expectation #1 – Over the past five years, the government has focused on building a strong infrastructure. Infrastructure spending as a percentage of GDP increased from 1.13 percent in FY 2019-20 to a budgeted estimate of 3.3 percent of GDP in FY 2023-24. Given the strong forward and backward linkages in the sector, spending helps support rural income and jobs; it is also likely to improve logistics costs. However, most spending is concentrated on roads and railways. On the other hand, over the past two years, spending on urban development and energy as a share of GDP has declined. – The government is expected to divert some of its expenses towards improving the port and shipping; energy, especially green and sustainable energy; and urban infrastructure. In this budget, the government’s focus should be on the transition from carbon-dependent to energy-efficient policies.
• Expectation #2 – To date, the public sector drove the maximum investment, while the private sector had a modest share. In a few sectors, investments have taken off faster than others. Global uncertainties and modest consumer spending have kept private investors at bay. A higher capex spending by the government is expected to crowd in capital spending. That said, it will require some government incentives and a few measures in this direction.
• Expectation #3 – In GDP, export growth contracted by 7.7 percent in 1Q FY24 after growing in double digits for the eight consecutive quarters. As the slowdown was largely driven by deceleration in growth of major economies, boosting exports in diversified and new markets, while helping existing markets grow, is important.
• Expectation #4 – Subsidies, as a percentage of budgetary outlay, are likely to be about 7 percent during FY 2023-24, down from 8 percent in FY 2022-23. This will help bringing down the fiscal deficit as the government consolidates its spending. However, lower subsidies can put pressure on rural demand amidst challenges such as lower agriculture output. The government is expected to divert savings from subsidies towards spending that can support sustainable growth in income amongst rural households, boosting the rural economy’s disposable income. One of the ways could be higher spending on building rural infrastructure or providing incentives that improve cash flow.
