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

Dubbed as the star performer by the International Monetary Fund, the 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 Advisor, Ernst and Young and member of the Advisory Council to the 15th Finance Commission talked about the challenges Indian economy is grappling with, and the way ahead.

Edited Excerpts:

How do you assess the Indian economy now?

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

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

I think the first challenge which is affecting not only the present but would affect India's medium term growth performance is the 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 the medium term also. We have to rely almost entirely on domestic growth drivers.

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

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

The 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, they are close to 29 per cent.

We have to emphasise the need to improve the overall savings rate which can then be translated into an investment rate which will then get translated into our growth. Within the saving rate, it is also important to emphasise that the 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 the surplus of household sector savings over their own investment, and this is the one that then supplies the deficiency of all resources by the government sector and the private corporate sector right now, with government sector fiscal deficit being much higher than these financial savings of the household sector, the situation is not getting created, where the interest rates can be driven down. So, we must ensure that the household financial savings rate improves.

Do you think that the 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. The reason is that direct taxes are doing very well but indirect tax buoyancy is still low and union excise duties have not done well. There 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 adding to this GDP growth inflation based on the 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 therefore, there would be a pressure on the centre's gross tax revenue performance and in the shortfall in indirect tax, buoyancy will have to be made up by additional buoyancy via direct taxes. If that happens, not only it should be made up, but also some of the additional expenditure side pressures on increased subsidies on fertilizers will also have to be accommodated. But luckily the amounts involved are not large. And you may be able to meet the target or miss it by a small margin.

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

I get worried about Centre-State fiscal relations. These central-state fiscal relations are some kind of imbalance. States are incurring fiscal commitments which they must rely heavily on transfers from the central government. But the 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, the tax-GDP ratio of the centre suffered an erosion and it had 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 made, then centre his own position, fiscal position does not appear to be that strong compared to its own commitments. Now as the state governments incur more and more responsibility to make promises to the population in terms of commitments, moving on to the new pension scheme or additional non-merit subsidies and so on. Then they will require resources and then they will ask the central govt to make more transfers. That is a situation which will cause fiscal imbalance in the system.

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

The capacity utilisation in the private corporate sector has been improved considerably considering the third quarter of last year and the first quarter of this year data available. So, now after a long gap the 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 the overall saving rate improves the economy and particularly the 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 either add 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.