The new government starts its third term on robust economic fundamentals. A higher-than-expected 8.2% gross domestic product (GDP) growth for fiscal 2024 and a sovereign rating outlook upgrade to positive - because of strong growth and improved quality of government expenditure - backgrounded a prolonged electoral battle.
Cut to the next scene: what are the factors likely to shape the National Democratic Alliance's (NDA) third innings?
Scan the landscape, and we foresee the global economy being resilient in 2024. But a multitude of factors - geopolitical uncertainties, debt piles, tariff friction and climatic disruptions - seethe underneath. How and when they are likely to disrupt economic activity is anybody's guess. Countries will have to create buffers to navigate this situation should headwinds materialise.
The domestic scenario shows healthy macro-markers adding to India's resilience, with fiscal consolidation, continuing disinflation and beefed-up corporate and bank balance sheets conspicuous. Mid- and large corporate balance sheets look particularly good after protracted de-leveraging.
At banks, non-performing loans are at decadal lows. External macros are comfortable as well, marked by a narrow current account deficit, low short-term debt and ample forex reserves.
Summing up the push-pull parameters - especially the transmission of high interest rates and a likely decline in fiscal spending owing to the government's consolidation mandate - we expect India's GDP growth to moderate to 6.8% this fiscal. Even so, India will continue to be the fastest-growing large economy.
For the medium term - or till the end of the current decade - CRISIL's base case is a healthy average growth of 6.7% annually. That will take India's GDP closer to the $7-trillion mark by fiscal 2031, from $3.6 trillion. Per capita income will catapult to $4,600 from $2,600, making India a middle-income country.
So far, so good.
But what about those tricky undercurrents?
The government will need to focus on five priorities to increase resilience, create upsides to growth, and make it inclusive and sustainable.
1) Avoid The Complacency Trap
India's rebound in the face of elevated global risks in the post-pandemic world was a result of good policy choices. This should not breed complacency in policymaking and reforms. If India wants to maintain its stature as the fastest-growing large economy and grow even faster, it cannot take its foot off the reforms pedal. Reforms pay off with a lag. The 1991 reforms boosted economic potential, but high growth materialised much later. Similarly, the seminal Goods and Services Tax (GST) was launched in 2017, but we are seeing material benefits only now. Over the next few years, the economy will gain from the ongoing infrastructure buildout and digitalisation, which are improving logistics and efficiencies. However, to sustain long-term growth, reforms must continue.
2) Roll Out Next Level Of Reforms
In addition to streamlining the GST and the Insolvency and Bankruptcy Code, the government needs to kick off the next level of reforms in land, labour and agriculture. Since they fall under the concurrent list, both the Central and state governments must move in tandem, which requires deft consensus-building. Moreover, these need to be implemented at the state level. The government made an attempt to simplify the complex labour laws by merging them into four codes a few years ago, but this is yet to be implemented.
3) Strengthen Private Investment Cycle
The post-pandemic recovery has largely been led by household investments and government spending on infrastructure. Consequently, investments have outpaced the economic growth rate and there is a significant rise in their share of GDP. The private sector has not been a major player in this investment revival despite competitive corporate tax rates, improved logistics, growing digitalisation and the Production Linked Incentive (PLI)scheme. More efforts to improve the ease of doing business and encourage large-scale private sector investments are crucial.
4) Emphasise Sustainable Growth
India is among the countries most vulnerable to climate change. Last year was the hottest on record globally. For India, it was the second-hottest, while August the driest month in 123 years. Heatwaves, changing rainfall patterns and physical damage from climate events will only intensify going ahead. Therefore, urgent efforts are needed to adapt to and minimise risks. To be sure, better preparedness, including setting up of early warning systems over recent years, has helped.
Mitigation strategies must include developing climate-resistant crops, more early warning systems and smart infrastructure, and industry planning. Agriculture needs to be made resilient. Not only is it the most vulnerable to climate change, but a large part of the population depends on it. Elevated food inflation - which has been thwarting changes in the interest rate cycle - is related to weather vagaries. From a long-term perspective, India needs to decarbonise to be on the path to net-zero by 2070. And it has to balance that with the objective of ensuring energy security and its affordability, both of which are vital for growth and development.
5) Create Jobs
Employment generation is a critical focus area. India has a predominantly young population and will contribute over 20% of the incremental global workforce over the next decade. In manufacturing, labour-intensive segments such as textiles, gems and jewellery, food processing, and leather and leather products need to be promoted.
Of late, exports in these labour-intensive sectors have not done well and their share in total exports has consistently declined. Focusing on relatively labour-intensive services, such as healthcare, education and hospitality, will augment job creation. Public investment in healthcare and education will not only create jobs but also raise growth potential by making the workforce skilled, educated and healthy. This will allow a larger part of the workforce to participate in the growth process and reduce income inequality.
All this will set the scene for high and sustainable long-term growth in India.
(Dharmakirti Joshi is Chief Economist, CRISIL Ltd)
Disclaimer: These are the personal opinions of the author