Status of Indian Economy

With the commencement of the Budget Session of the Parliament today, the Economic Survey 2023-24 was presented by the Union Finance Minister Nirmala Sitharaman. As always, the Economic Survey 2023-24 was the most awaited document before the Union Budget of the incumbent NDA government—the first one after its re-election. On many counts, this Economic Survey (ES henceforth) stands out. While it was expected that it would paint a hunky-dory picture of the Indian economy in the middle of a global gloom (and there is no denial of that as revealed by the hard data), this is for the first time that an ES has come out with some sensible futuristic recommendations, especially for the medium term. This, of course, keeps in mind the longer-term vision of Viksit Bharat 2047—India’s ambitious vision to catapult the nation into a developed economy while approaching 100 years of its independence. As stated, there is no denying the fact that India has presented itself as a “bright star” amidst the global economic gloom. India’s real GDP growth grew at 8.2 percent in 2023-24 as per the National Account Statistics (NAS) estimates, exhibiting the highest growth among all the major economies of the world including the developed world and the emerging economies. While this part was known, what was largely floated as a myth at one point in time has been busted by the ES—this is related to household savings. Contrary to the thinking that household savings have declined, it has earlier been argued that household savings have increased. The ES buttresses that contention and shows that the enhanced household savings are moving towards savings in physical assets; further, the savings in physical assets as a percentage of GDP have increased over the last three years. Similarly, there is no denying the fact that despite the global disruptions and commodity price volatility, overall inflation in India has been under control, and has ranged between 4-5 percent in terms of the Consumer Price Index. This has been significantly lower than the global average and that of EMDEs in 2022 and 2023. Even in June 2024, the inflation rate was around 5 percent, which is lower than the global average. This is a reflection of good marketing practices through market intelligence, hedging and price risk management, especially in global commodities like energy. However, the matter of concern that has not been highlighted in the document is the current food price inflation caused due to largely domestic market cornering and opaqueness in agricultural marketing practices. The ES talks of the widening Current Account Deficit (CAD) as one of the important features of the macroeconomic scheme. Yet, in that scheme, the burgeoning trade deficits with China have not been discussed. By 2023-24, India’s trade deficit with China stands at US$ 85 billion, with Russia at US$ 57.2 billion, with South Korea at US$ 14.71 billion, and with Hong Kong at US$ 12.2 billion. While the trade deficit with Russia can be attributed to the rise in crude imports at a substantial discount that has helped the Indian economy in controlling inflation, a large component of India’s trade deficit with China can now be attributed to the large proportion of intermediate commodities (67 percent) and capital goods (17 percent) imports as per 2023-24 data. Generally, it is felt that imports of intermediate goods help in creating a more competitive system in the space of international trade and macroeconomics. It is a fact that lately, India’s overall trade deficit has declined in 2023-24, and inflation is also under control—to what extent these two developments can be attributed to the import of intermediate commodities needs a more detailed analysis. Where this Economic Survey stands out is in terms of Chapter 5, which talks of “a growth vision for new India”. To do so, the chapter identifies the areas of key policy focus and presents a six-pronged strategy to achieve this goal. It talks of human capital development through three verticals, namely, generating productive employment, reducing the skill gap, and enhancing the health of the youth; tapping the full potential of the agriculture sector; easing compliance requirements and financing bottlenecks for MSMEs thereby creating better business conditions and reducing the transaction costs of doing business; managing India’s green transition; addressing the Chinese challenge in the global value chain; deepening the corporate bond market; and finally reducing inequality. While there should be a general agreement with most of the points, concerns of departure stand out in two aspects. The first is tapping the full potential of the agricultural sector. This has been a perennial challenge for India. Chapter 9 has been dedicated to the agriculture sector to address this issue. However, the chapter has largely addressed the agricultural marketing challenges, which, no doubt, is overwhelming! However, the chapter has hardly delved into the productivity question, which is extremely important given that India’s agricultural productivity is still one of the lowest in the world. Even while talking about the agricultural marketing process, the chapter could have talked a bit more about regulation and risk management. While agricultural derivatives have been in vogue in India, there is a general level of inefficiency in commodity marketing and transportation brought about by the commodity transaction tax on the non-agricultural commodity segment and lack of innovation in the general hedging instruments in India. Further, there is a clear lack of physical market regulation resulting in market cornering and food price inflation in domestic commodities. The second point is the question of the Chinese challenge. While India’s contribution to the global value chain (GVA) is substantially low, the ES would have been done well had it mentioned the opportunities arising for India in the context of the China+1 strategies of global corporations in their attempts to diversify their production and supply chains rather than concentrating the same in one destination.