India has become the fastest-growing major economy globally and is anticipated to be one of the top three economic powers within the next decade. India’s Gross Domestic Product (GDP) saw an impressive growth of 8.2 per cent in 2023-24, according to the National Statistical Office (NSO), surpassing all economic forecasts. This figure even exceeded the NSO’s advance estimates, which had predicted a 7.6 per cent increase in GDP for the previous year. The growth rate for the January to March 2024 quarter was 5.9 per cent, down from 8.4 per cent in the third quarter. However, the fourth quarter recorded a 7.8 per cent growth rate, slightly lower than the revised 8.6 per cent rise in the preceding quarter. Private consumption, a crucial factor for the revival of industrial investments, remained weak but showed a slight improvement compared to the first half of the year.
In its latest monetary policy review in early June, the Reserve Bank of India projected a 7.2 per cent GDP growth for 2024-25, up from its previous estimate of 7 per cent. Retail inflation is expected to trend down to 4.5 per cent, compared to last year’s average of 5.4 per cent. However, initial indicators for the first two months of this year suggest a slow start. Industrial output growth slowed to a three-month low of 5 per cent in April, according to data released on June 12.
Meanwhile, Goods and Services Tax (GST) collections, which serve as a proxy for consumption, surged to a record high of over Rs two lakh crore in April, driven by year-end compliances. Although collections in May, based on transactions from April, remained strong, the growth rate dropped to just below 10 per cent, the lowest since July 2021. This decline may be partly due to the heat waves affecting several regions this summer. However, an anticipated above-normal monsoon is expected to boost farm output and invigorate the rural economy. Consequently, GDP growth for 2024-25 is projected to be around 7.3 -7.4 per cent, though the base effect might lower this growth. In contrast, rating agency CRISIL’s estimate is slightly lower than the RBI forecast, at 6.8 per cent.
Ball in Finance Minister’s Court
Nirmala Sitharaman, taking the helm of the Finance and Corporate Affairs Ministry, has affirmed that the reform momentum initiated since 2014 to strengthen India’s macroeconomic stability and growth will persist. Sitharaman emphasized improving the ‘ease of living’ for citizens as a primary goal, while expectations are high for the Budget to tackle pressing issues such as controlling inflation, boosting consumption and investments, and resolving complex taxation concerns, including the recent 45-day payment deadline for micro, small, and medium enterprises, which inadvertently affected them.
The Budget must also outline the government’s strategy for rationalizing and reforming the indirect tax system, which marks its seventh year on July 1. Additionally, it should incorporate elements from the 100-day agendas set by various ministries, and provide detailed updates on initiatives announced in the interim Budget before the elections. Sitharaman, advocating for India’s manufacturing sector to integrate more deeply into global value chains, must unveil measures to facilitate this transition, potentially including reductions in high import tariffs.
The upcoming Budget of this administration is expected to cater to specific state needs, such as Andhra Pradesh and Bihar, championed by regional allies like the Telugu Desam Party and the Janata Dal United. Beyond addressing these concerns, it must outline the government’s agenda for the term and shed light on India’s ambition to achieve developed nation status by 2047, a vision spearheaded by Niti Aayog. Looking back at India’s economic reforms, typically driven through effective coalitions, this Budget may signal whether the current coalition government intends to adopt a fresh, more consensus-driven approach to advancing India’s reform agenda.
Coalition Government and Economic Reforms
Following the Lok Sabha election results, Prime Minister Narendra Modi has secured a third term in office, leading a coalition government. Continuity in government policy is widely anticipated, with top ministers retaining their portfolios. Fitch ratings predict India’s robust medium-term growth outlook will remain strong, supported by the government’s capital expenditure initiatives and improved corporate and bank balance sheets. However, Moody’s Ratings was less optimistic about fiscal management prospects compared to Fitch. Hence, the potential for significant improvements in medium-term growth may be restricted if advancing reforms prove to be more difficult.
While “broad policy continuity” is anticipated in areas like the focus on public capex to stimulate the economy and gradual fiscal consolidation, a BJP-led government reliant on coalition partners may find it challenging to implement contentious reforms, especially regarding land and labour, which have been highlighted as party priorities. The NDA’s relatively narrow margin of victory and the BJP’s loss of its outright majority in Parliament may delay more extensive economic and fiscal reforms, potentially hindering progress on fiscal consolidation. Additionally, the near-term economic momentum obscures structural weaknesses that threaten long-term growth potential, such as “high levels of youth unemployment,” “weak productivity growth” in India’s large agricultural sector, which still employs 40 per cent of the workforce, and a decline in inward foreign direct investment (FDI) flows for the past three years.
Until the 2014 Lok Sabha elections, when the Bharatiya Janata Party secured 282 seats and Narendra Modi ascended to power, India experienced 21 years of coalition governments. A decade later, the BJP holds 240 seats in the Lok Sabha, and India is once again governed by a coalition. Fitch has indicated that coalition politics and a weakened mandate for the NDA could hinder the passage of ambitious reform legislation. It raises the question: Do coalition governments impede the economic reform agenda?
The coalition government’s performance on the economic front has been satisfactory. Historically, there has been a significant continuity between successive governments and their policies, with no major reversals observed. Policy changes have been gradual and incremental since 1991. Public bargaining between coalition parties ensures that diverse viewpoints are heard and accommodated. Over time, coalitions have institutionalized decision-making mechanisms to include various voices. For instance, the V.P. Singh government established six committees to address pressing issues, which evolved into ‘Groups of Ministers’ during Atal Bihari Vajpayee’s tenure and continued into the UPA era.
When it comes to reforms, coalition governments have proven more effective. In contrast, single-party governments have made decisions, such as the farm laws, without achieving consensus. Such unilateral decisions would likely not occur in a coalition government due to the necessity for extensive dialogue. Institutions designed to facilitate and promote Centre-State relations are more active under coalition governments. This is unsurprising, as coalition partners are often regional parties. While this may lead to a more turbulent policy-making process, it also tends to be more informed.
Despite the BJP forming the government with the support of its allies, all the key ministries remain under BJP control. It remains to be seen whether the decision-making and governance style of the past decade will undergo significant changes. Regarding the economic outlook, Andhra Pradesh Chief Minister Chandrababu Naidu was one of the earliest proponents of liberalisation. The primary difference lies in the distribution of power and the decision-making style. Therefore, conflicts over economic policies are unlikely, as parties across the spectrum are committed to economic reforms. The only potential variation might be the speed of decision-making, which depends on the methods and mechanisms employed. It could provide insight into whether economic reforms will progress or stall.
As a final point, India’s economy is set to grow robustly, driven by strong private consumption, increased private and public investment, and a strategic focus on sustainability and education. However, careful management of potential risks will be essential to sustain this growth.
