What’s the biggest worry for the Indian economy? Veteran economist DK Srivastava explains

Dubbed as star performer by International Monetary Fund, Indian economy is poised to become a force to reckon with, however, it has many challenges to deal with. In a freewheeling conversation with Republic Business, DK Srivastava, Chief Policy visor, Ernst and Young and member of visory Council to 15th Finance Commission talked about challenges Indian economy is grappling with, and way ahe.

Edited Excerpts:

How do you assess Indian economy now?

At present Indian economy is doing very well as compared to performance of global economy. In fact, India is doing exceptionally well. Russia-Ukraine war and now Israel-Hamas war are setbacks that affected Indian economy in last three to four years. global supply situation has been b, global demand for Indian exports have been slowing down and crude petroleum prices have remained unpredictable. And all of se weighed heavily on performance of Indian economy. Given that situation, Indian economy has shown exceptionally good performance.  And IMF has called India as star performer.

What are top three challenges that you see Indian economy has in front of it, as we are ushering in 2024?

I think first challenge which is affecting not only present but would affect India's medium term growth performance is global economic slowdown translating itself into a contraction in our export performance. Net contribution of export may remain negative not only for this year, but on average in medium term also. We have to rely almost entirely on domestic growth drivers.

And fact that RBI is assessing a growth of 7 per cent for FY24 is refore extremely praiseworthy, this is despite a near 4 per cent negative contribution of exports. This is first constraint. 

second constraint is in terms of fiscal situation, our consolidated consolidated debt-GDP ratio, fiscal deficit-GDP ratio of central and state government is still well above ir corresponding benchmarks in respective fiscal responsibility legislation and unless that situation is brought under control, it will continue to constitute a drag on growth potential particularly domestic growth potential.

third consideration is that our savings and investment rate have been declining. Basically, domestic growth depends on when domestic saving and investment rates and our nominal saving and investment rates have been falling in recent years and have gone below 30 per cent of GDP, y are close to 29 per cent.

We have to emphasise need to improve overall savings rate which can n be translated into an investment rate which will n get translated into our growth. Within saving rate, it is also important to emphasise that household financial savings rate has fallen in recent years, it used to be around 7 to 7.5 per cent of GDP, but now it is just a little over 5 per cent.

Now, this financial saving reflects surplus of household sector savings over ir own investment, and this is one that n supplies deficiency of all resources by government sector and private corporate sector right now, with government sector fiscal deficit being much higher than se financial savings of household sector, situation is not getting created, where interest rates can be driven down. So, we must ensure that household financial savings rate improves.

Do you think that fiscal deficit target of this year will be met very easily?

I don't think it will be met very easily, but we might just make it, or we might miss it by a small margin. reason is that direct taxes are doing very well but indirect tax buoyancy is still low and union excise duties have not done well. re is also a concern that is linked to nominal GDP growth vis a vis real GDP growth.  Right now, real GDP growth is 7 per cent. But nominal GDP growth depends on ding to this GDP growth inflation based on implicit price deflator right that may be about 2.3 per cent or so, that will give us an overall nominal growth of 9.5 per cent budgeted assumption was 10.5 per cent.

And refore, re would be a pressure on centre's gross tax revenue performance and in shortfall in indirect tax, buoyancy will have to be me up by ditional buoyancy via direct taxes. If that happens, not only it should be me up, but also some of ditional expenditure side pressures on increased subsidies on fertilizers will also have to be accommodated. But luckily amounts involved are not large. And you may be able to meet target or miss it by a small margin.

What is your biggest worry as far as Indian economy is concerned?

I get worried about Centre-State fiscal relations. se central-state fiscal relations are some kind of imbalance. States are incurring fiscal commitments which y must rely heavily on transfers from central government. But central government's own resource position has not seen strong enough because we have faced in recent years a stagnant or falling tax-GDP ratio, tax-GDP ratio of centre suffered an erosion and it h fallen to something close to 16 per cent of GDP from an earlier peak of close to 18 per cent.

And from that, when transfers are me, n centre his own position, fiscal position does not appear to be that strong compared to its own commitments. Now as state governments incur more and more responsibility to make promises to population in terms of commitments, moving on to new pension scheme or ditional non-merit subsidies and so on. n y will require resources and n y will ask central govt to make more transfers. That is a situation which will cause fiscal imbalance in system.

Do you think private capex has taken off or is it still tepid?

capacity utilisation in private corporate sector has been improved considerably considering third quarter of last year and first quarter of this year data available. So, now after a long gap utilization is close to 75. So, I expect a positive trend on private capex that we need to bring interest rates down sooner or later and that will happen on a stable basis. Once overall saving rate improves economy and particularly rate of household financial saving improves.

How do you assess rising imports from various countries in India?

We should distinguish between imports that are meant to serve as inputs to final output that is to be produced in India. As long as we are importing inputs that will eir d to domestic output for domestic consumption or for exports, it is still all right. But what should be discouraged is important for purposes of consumption within India. As long as our import policy is geared to cater to this distinction between importing inputs and importing final consumption goods, that is alright.