India will grow at a quicker clip than developed and emerging markets but needs to grow faster to fulfill the aspirations of its 1.4 billion people, according to Montek Singh Ahluwalia, the former deputy chairman of the erstwhile planning commission.
“At the level of incomes we have and the very legitimate expectations that people have that we should improve our levels of living, education, health, conditions of living in the rural areas, urban areas…this is not going to happen if we do not accelerate our growth,” Ahluwalia told Moneycontrol in an interview.
“Somewhere between 7 to 8 percent is what we ought to be aiming at. Whether we get there or not depends on the policies we follow and the state of the world.”
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India’s economy is poised to be the fastest growing major economy this year in a world that is slowing amid a coordinated monetary tightening globally. Persistent risks from the Russia-Ukraine war and a resurgence of the pandemic in China also threaten economic activities world over.
India has a certain consensus on policy, including the need for fast and inclusive growth, fiscal discipline, improving infrastructure and the like, Ahuwalia said.
But it needs a raft of reforms, including higher public spending on health and education, research on climate change, defense expenditure, expenditure management, boosting infrastructure, making it easier to get into and exit businesses to break into a higher growth trajectory, he added.
We could also look at what China did in the previous decades to develop domestic industry.
“They (Chinese) built the best infrastructure anyone can think of, they put in place logistical procedures, which actually helped Chinese companies that wanted to deal with the rest of the world. They recognized that initially their skill is going to lie in simple manufactured goods, which are labour intensive.”
Toughest job in the world
Due to present her budget a few weeks’ time, Finance Minister Nirmala Sitharaman has one of the toughest jobs in the world, Ahuwalia said.
“She is more or less under notice from every person… that don’t cut good expenditure and everybody’s view of good expenditures includes virtually all the subsidies that are being given. Everyone is in favour of cutting subsidies in general. But identify the subsidy concerned…nobody is willing to stand up and say we should get rid of this.”
As such, reforms are more important to boosting India’s potential growth.
How quickly the finance minister reduces the fiscal deficit is not the most important thing, Ahluwalia said.
“Combined fiscal deficit not going to 12 percent (of GDP) is crucial. If we can believe the fiscal deficit is going to come down 5 percent in next four or five years, that would be a major gain.”
India’s central government has repeatedly been unable to meet its medium-term fiscal deficit target. The budget deficit shot up during the pandemic when the government raised its expenditure even as revenues nosedived. States’ debt also ballooned.
The finance ministry aims to lower the fiscal deficit to below 4.5 percent of GDP by fiscal year 2025-26, lowering it gradually from the targeted 6.4 of GDP this fiscal year.
The needed fiscal turnaround of 10 percentage points of GDP needs to can happen either through taxation or getting rid of not so productive expenditure, Ahluwalia said.
That is a big challenge. I doubt whether we can do that much on taxation in four or five years.
That brings us to expenditures that can be cut.
“I don’t blame the government. There isn’t any willingness on the part of any group to tolerate any cut in any expenditure,” Ahluwalia said.
Moving away from budget secrecy
India needs to completely debunk the secrecy of the budget, Ahluwalia said.
“Intelligent discussion on the budget cannot take place in an environment in which the finance ministry is traditionally required to maintain secrecy,” he added.
“In no country can you have intelligent fiscal development unless the political consciousness in parliament and outside addresses the question - Where is the money coming from?”
