Economy's health is good but the common man misses "the feel-good" factor

                               

GDP growth projections by Global Institutions of Advanced Economies and Emerging Market Economies including India are given in Table 1 herein below:

Table 1:

The above chart indicates that the GDP growth of Indian economy in Calendar year 2023 has  been revised upwards by OECD from 5.7% to 6% and downwards by World Bank from 6.6% in Jan 2023 to 6.3% in June 2023. The convergence is between 6-6.3% with RBI and Department of Economic Affairs of Ministry of Finance are projecting 6.5% growth in FY2024 with risks evenly balanced.IMF is projecting at below 6% .However all these forecasts are showing slowdown from the growth attained in the last two fiscal years at 9.1% in FY22 and 7.2% in FY23.

 Table 2:Key Fiscal Indicators (as a  per cent of GDP)

  

Indicator	2021-22	2022-23			2023-24
	Actuals	BE	RE	PA	BE
1. Fiscal Deficit	6.75	6.44	6.43	6.36	5.92
2. Revenue Deficit	4.39	3.84	4.07	3.92	2.88
3. Primary Deficit	3.32	2.79	2.98	2.95	2.34
4. Gross Tax Revenue	11.54	10.69	11.14	11.21	11.14
5. Non-Tax Revenue	1.56	1.05	0.96	1.05	1.00
5. Revenue Expenditure	13.64	12.38	12.67	12.67	11.61
6. Capital Expenditure	2.53	2.91	2.67	2.70	3.32
(i) Capital Outlay	2.28	2.37	2.27	2.28	2.77

Notes: 1. GDP used for 2022-23 budget estimates (BE) and revised estimates (RE) is as per the Union Budget 2022-23 and 2023-24, respectively.

2. For 2022-23 (PA), the GDP used is the provisional estimates (PE), released by the Ministry of Statistics and Programme Implementation (MoSPI) on May 31, 2023.

Sources: Union Budget Documents; and Controller General of Accounts (CGA).

Table 3: Key Fiscal Indicators (as a per cent of GDP/GSDP)

Indicator	2021-22 Actuals	2022-23			2023-24 BE
		BE	RE	PA
Gross Fiscal Deficit	2.8	3.4	3.1	2.8	3.2
Revenue Deficit	0.4	0.3	0.5	0.3	0.2
Primary Deficit	1.0	1.6	1.4	1.2	1.4
Tax Revenue	10.0	10.1	9.3	9.8	10.6
Non-Tax Revenue	1.1	1.3	1.0	1.0	1.2
Revenue Expenditure	14.2	15.3	13.7	13.5	14.6
Capital Expenditure	2.5	3.2	2.7	2.5	3.2
i) Capital Outlay	2.3	2.9	2.4	2.2	2.9

Note: Data for 2021-22, 2022-23 (BE) and 2022-23(PA) pertain to 31 States/ UTs and for 2022- 23 (RE) and 2023-24 (BE) pertain to 29 States/UTs. Data for 2023-24(BE) is taken as a per cent of GSDP.

Source: Budget documents of the states; Comptroller and Auditor General of India and RBI.

 

Table 2 and Table 3 indicate the fiscal health of Indian Economy as per Central Govt

and State Governments perspective. Fiscal Deficit is getting reined in at the Central 

and the States level also. The combined Fiscal Deficit is at 6.36%+2.8% i.e 9.16% .

The trajectory of this combined Fiscal deficit is showing a downward slope and this 

is important for the Economy to grow steadily with the percolation of its benefits 

to large sections of the population.

More than this, the inflation trajectory should also come down swiftly since Inflation 

is also an additional tax burden in the hands of the common man. 

Considering the Revenue buoyancy of the Central Govt.it should look at avenues to 

bring down the Excise burden on the Fossil Fuels and domestic LPG as a relief to the 

common man.The cascading effects of fossil fuel price increases will have to be

tamed by this step

GOI must also look at leaving more money in the hands of common man to prime

up Private consumption which contributes to the bulk of our GDP growth i.e almost 

55-60% of GDP.Only then the virtuous cycle of consumption and private investments

kicking in with a fervour can happen in the Economy.

Despite all the chest thumping by the Govt still 'the feel-good factor" is lacking in 

the economy.

(Courtesy:RBI'smonthly bulletin June 2023)

Reduce "GDP" for "Acche-din" feel-good factor!!

 Private consumption is the spending of households and individuals on consumption of goods and services.Private consumption in India during FY22-23 rebounded in India due to two reasons-1)one is due to the "pent-up" demand after the pandemic years of suppressed private consumption ;2) The increase in private consumption  during FY22-23 signals that households have more disposable income in their hand which in turn drives economic growth.

Private consumption expenditure which comprises 61 per cent of the GDP estimates, grew by 7.5 per cent during FY22-23, higher than the pre-pandemic five-year average of 6.9 per cent.But the worrying point is that the private consumption growth was weak at 2.8% (YOY)in Q4 of FY22-23.

Since private consumption accounts for approx 58-61% of GDP, Govt's policies must support them by enabling the households to have more disposable income in their hands.For that to happen, GOI will have to work on two pronged strategy 1)look at avenues for incomes to increase but this may not yield results quickly;2) look at reducing expenses for the households which can provide quick boost to the disposable income in their hands.

Inorder to enabling reduction of household expenses GOI must look at low hanging fruits and that is reduction of GDP i.e Gas(domestic subsidised LPG), Diesel and Petrol !!

This immediate reduction can provide significant momemtum to the increase in Private consumption and also bring down Inflation levels quickly as Fuels have higher rubbing off effect on all areas of the cost to the economy.It can assuage inflation expectations across all sectors of the economy and can push the private consumption levels.

More than this, this reduction of GDP prices will bring in "Acche-din" feel-good factor back to the households

India's Sovereign Ratings- Challenges for Improvement in Ratings

 

- Brief overview of India's sovereign ratings:

 India's sovereign rating is a measure of the country's creditworthiness and ability to repay its debts. It is determined by various credit rating agencies based on factors such as economic growth, fiscal policies, political stability, and external debt. India's current sovereign rating stands at BBB- with a stable outlook from Standard & Poor's, Baa3 with a negative outlook from Moody's, and BBB- with a stable outlook from Fitch Ratings. Despite challenges such as high public debt to GDP ratio necessitated by Covid and widening fiscal deficit , India has been able to retain Investment Grade Ratings due to sustained improvements in public finances. (Fiscal deficit trend)

 - Sovereign rating is crucial as it reflects the creditworthiness of a country and its ability to repay its debts. It also affects the interest rates that a country has to pay on its borrowings, which in turn impacts its economic growth and development.

 -  Furthermore, sovereign ratings are used by investors to assess the risk of investing in a particular country. A lower rating can result in decreased foreign investment and a weaker currency, while a higher rating can attract more investment and strengthen the economy. Therefore, maintaining a good sovereign rating is essential for a country's financial stability and growth.

India's Sovereign Ratings: How it can be Improved

The strengths of the Indian economy lie in its fast-growing economy and strong external balance sheet. However, S&P Global Ratings has flagged weak fiscal performance and low GDP per capita as areas of concern.Fitch Ratings have also mentioned that headwinds due to inflation, high interest rates, global slowdown apart from internal factors like high debt and fiscal deficits will moderate India's growth in the next few years before rebounding to 6.7% by 2025.

S&P expects India's economy to grow by about 6% in 2023/24, with investments and consumer momentum helping growth prospects over the next few years. However, despite its strong economic growth, India's sovereign credit ratings do not fully capture its fundamentals. The Economic Survey has called for sovereign credit ratings methodology to be made more transparent, less subjective and better attuned to reflect an economy’s fundamentals.

One way to improve India's sovereign ratings would be to address the concerns raised by rating agencies such as weak fiscal performance and low GDP per capita. This could involve implementing policies aimed at reducing the fiscal deficit and increasing GDP per capita through measures such as increasing investment in human capital and infrastructure.This years'budget has increased Capital Expenditure to Rs10 lakh cr. in an unprecedented infra push which will have a multiplier effect throughout the economy and will also crowd in private investments.The new PLI scheme is also expected to add to these efforts in increasing manufacturing growth and generating job opportunities to the growing population. This can also give a fillip to the country's exports of manufactured products by taking advantage of China+1 strategy of many MNCs like Apple etc.

Another way to improve India's sovereign ratings would be for developing countries to come together to address the bias and subjectivity inherent in sovereign credit ratings methodology and bring in more transparency. India has already raised the issue of pro-cyclicality of credit ratings in G20.

In conclusion, improving India's sovereign ratings would involve addressing the concerns raised by rating agencies as well as working towards making the sovereign credit ratings methodology more transparent and objective.