Economic Survey 2023 | If additional reforms are undertaken India can grow beyond 7%, says CEA Nageswaran

The survey said that government was on track to achieve fiscal deficit target of 6.4 percent. It stressed that availability of fiscal space is paramount amidst global uncertainties.

The survey warned that "entrenched inflation" may prolong the monetary tightening cycle, keeping borrowing costs "higher for longer."

Finance minister Nirmala Sitharaman will present the union budget 2023 tomorrow. This is will be the last full budget before the general elections in 2024. It shall also be the last budget presented in the current parliament building.

In an exclusive interview to CNBC-TV18, Chief Economic Advisor V Anantha Nageswaran said that if additional reforms are undertaken India can grow beyond 7 percent in the remaining decade. However he admitted that downside risks to the growth estimates are higher in the global context.

Q: Let me start by talking to you about your growth projections, 7 percent for FY23, 6.5 percent for FY24 and nominal growth of 11 percent, that is higher than what market economist are factoring in. Most seem to be closer to 6 percent if not slightly lower, and nominal at about 10 percent. I know you have projected your growth accelerants, your growth magnets as the reason behind why you believe that we should get to 6.5 percent next year, and you are even ambitious enough to project 7 to 8 percent over the rest of the decade. What are you most confident about? And what is the single biggest risk factor global and domestic that could be the downside risk?

A: First of all, I did not predict 7 to 8 percent for the rest of the decade, I said if additional reforms are undertaken, it is possible to go beyond 7 percent. But I was more talking about a range of 6.50-7 rather than 6-6.50 percent. If you look at the IMF forecast released this morning, for 2023-2024, they talk about 6.1 percent. But there are many other agencies which are within this ballpark of between 6-6.50 percent.

Given the uncertainties we face, I think, few basis points of difference, these are in the context of GDP estimation, these are all not big differences. We also highlighted while stating our base case of 6.50 percent, that the downside risk is higher than the upside to that baseline estimate. And when we talked of entrenched inflation and tightening cycle could prolong that is something that we spoke in the global context.

Q: But if I were to ask you about the risk factors domestically, what is it that you would be most concerned about? One of the aspects that you have talked about in the survey is the current account deficit, at this point in time you believe that it's manageable, but you also talk about the need to monitor that closely? What would you be watchful off?

A: So domestic context, I don't see too many risks to growth. I also mentioned in my presentation that much of the risks or even almost all of the risks come from the global uncertainties we face both political and economic. And obviously, primarily, it stems from uncertainties with respect to the evolution of commodity prices, and also potential supply chain disruptions if the war intensifies, or some other developments happen. So in that sense, given the fact that even high frequency indicators with respect to India in the third quarter are still doing quite all right, my best assessment is that the risks to our growth estimate stem predominantly from global factors.

Q: Let me address the issue of capex, and you have outlined in the survey how the center's capex has increased from a long average of 1.7 percent of GDP between 2009 and 2020 to 2.5 percent of GDP at this point in time. In the survey, you also talk about incipient visible signs of private capital formation. In that context, do you believe the heavy lifting which the government has done so far on capex will have to continue or do you believe that we should possibly look at some sort of tapering there?

A: I think it is something that India has to do not on an either or basis, but on a and basis. That is, the investment requirements for us to move from a lower middle income to middle income category countries is to have investments coming both from the public and the private sector. So, given the economic cycle, one will dominate the other. For example, in the first decade, the private sector was willing to invest and invested quite a bit. And now, in the last several years, given the stress in the banking and non-banking system and in the corporate balance sheets, the government took on the mantle of driving public investments and creating infrastructure. So, I think whether these things moderate cyclically, or expand cyclically will depend on the context, but there is room for both to happen.

Q: You also suggests that we are starting to see private sector capex picking up and you believe that in a way that animal spirits that we have all been waiting for them to be unleashed, are possibly on the cusp of being unleashed. How confident do you feel on that on the back of the fact that we are seeing double-digit credit growth at this point in time? As well as the repairing that we have seen on both corporate balance sheets, as well as bank balance sheets, which you talk about extensively?

A: I pin my hopes on the fact that balance sheets are very important drivers and so are current profitability trends, and both of them are pretty robust for the corporate sector to invest and they have been investing. I mean, that is what we mentioned in the presentation and in the chapter as well, that investment rates were higher than they were in the first half of the last financial year. And there are signs that the foreign direct investment has also held up quite well.

We must understand that, despite the balance sheet improvement, the kind of immediate or instantaneous response on the investment front was held back because of global developments and shocks. And that is why I feel as and when the global shocks slowly recede or people get used to them and find ways of dealing with them or getting around them, then investment rates will start to pick up and we will begin to see them in the data.

Q: I want to address the issue of fiscal consolidation and link that to the very first chapter which talks about how we have emerged from the pandemic and you believe that the recovery is now complete. In fact, that is the headline, as far as that chapter is concerned. Given the fact that we have emerged and are resilient, and we are now talking about a resurgence at this point in time, how important will it be for the government not to deviate from the fiscal glide path that has already been projected in the government?

A: There is no reason to believe that the government is deviating from the fiscal consolidation path and we will see the signs when we all see the budget tomorrow. But important point to note is that India's public debt ratio hasn't materially increased in the last 15-16 years as it has happened in advanced nations. And we also show in the survey in chapter three on the fiscal situation that few years of steady nominal GDP growth will cause a meaningful reduction in the fiscal deficit parameters. So yes, fiscal deficit consolidation is important, but more than the headline, what matters is the quality of government expenditure and that has improved quite a bit, both at the union government level and at the state government level. In the last several years, the share of capex has gone up, we have a chart on that the share of revenue expenditure has come down. And therefore, we need to work on both, on the quality front - I would say quality front is more important than the headline deficit ratios because India's debt sustainability is not in serious doubt.

It is important to continue to make improvements in terms of efficiency gains from public expenditure, and also qualitatively improve them in terms of having creating more space for ourselves in terms of social welfare, spending, development, spending, etc. And that would come from some of the asset monetisation plans that the government has. But in general, given the demographic advantages we enjoy, and given the fact that India's nominal growth by and large, except in the last few years, because of the pandemic, and before that, the balance sheet problems we faced nominal GDP growth has run ahead of the cost of borrowing for the sovereign. And that if it continues, as we expect, fiscal parameters will improve quite meaningfully in the years to come.

Q: I want to address one of the other aspects that you talk off and that I think is something that the Prime Minister also seem to allude to this morning when he said that the world will be watching India's budget very closely. You talk about how India has presented itself as a credible investment destination for capital diversification. On that front, many steps have already been taken, whether it's a 15 percent concessional tax rate for new manufacturing facilities, changes in customs duties, and so on and so forth. How much work do you believe has already meaningfully been done? And how much work do you believe is still needed to be done to ensure that we truly realise this potential?

A: No, these will always be work in progress, you address some issues, new issues will crop up and new sectors will want their issues to be addressed. So there is never a time when we can say we have done everything and there's nothing more left to be done, that would actually be a sign of concern.

Having said that, the way to assess any policy performance is, what is the marginal development? What is the incremental change at the margin, and from that perspective, we must say that lot has been done to attract investments, to signal government's intent in creating a supply chain network to plug India into it, and inviting expressions of interest from private sector across the world with respect to the PLI schemes or for that matter on foreign direct investment, putting most of them into automatic route etc. So ultimately, of course, all of us will argue that the proof of the pudding is in the eating. But we forget that in economics, a key phrase is ceteris paribus. Even as government takes actions, the situation never remains the same, there are other shocks that come in the way that delay the onset of the impact and that is what we have been facing. But as far as we are concerned, the efforts are continuously being taken. And at some point, we will begin to see and we are seeing - if you look at the numbers, we have presented, foreign direct investment to GDP ratio has stepped up and absolute dollar amounts that are coming into the country in terms of foreign direct investment, have also shifted a level higher, in spite of the fact that the GDP numbers themselves have been growing. So I think we are on the right track. But there is no question that this is always a work in progress, and shall remain so.

Q: What has been the challenge of being able to put this survey together? It is the first survey that you have authored, what has been the most interesting aspect of being able to put it together? And what's been the big challenge of putting it together as well.

A: I always told my colleagues that we are not putting together a survey, but we have to put together an annual economic story behind it. And that is an important challenge. And ultimately also we have to make sure that everything is backed up by evidence as much as possible. And of course, writing is a skill that comes with practice.