10.5% growth rate is achievable, says NCAER chief

Amid continued global uncertainty, and high – although moderating – inflation, the Centre has assumed a nominal GDP growth of 10.5% in the next financial year. Fiscal deficit has been budgeted at 5.9% of GDP despite a high growth in capital spending which is budgeted at over Rs 10 lakh crore. The finance minister is banking on public spending, specially on roads and railways, to drive demand and create jobs, while getting the private sector to invest more.Director general of leading think tank National Council of Applied Economic Research (NCAER) Poonam Gupta, who is also a member of the economic advisory council to the Prime Minister, speaks to Times of India’s Sidhartha on various issues related to the economy. Excerpts …Sidhartha: The nominal growth rate that has been assumed in the budget is 10.5%. There are views on both sides. How do you see it? Poonam Gupta: There are two points here. The nominal growth rate is a combination of real growth rate and inflation rate that’s assumed. If we look at India’s growth outcomes in the past, especially during the pre-pandemic period, 10.5% is a highly conservative estimate, even accounting for the global headways that continue to be there.Why do I say this? As in the economic survey, as well as in the budget, the real growth rate that has been projected is 6.5% and inflation or GDP deflator rate is only 4%. So, 10.5% can happen easily even if on real side there is a little bit of a downside that we might not get 6.5%. But inflation will make up for that.10.5% seems eminently reasonable if not conservative and in my view the actual outcome may be a slightly higher, at 11.5%.S: One of the big variables, as you said, is inflation. Given the global uncertainty, and what’s happening in Europe and other parts of the world, and the impact of interest rate increases in many parts of the world, how do you see inflation playing out?PG: Globally, inflation rate is still running very high despite some moderation that we have seen over the past 5-6 months. The IMF has just come out with its revised projections for the world in its publication called the World Economic Outlook. In this, it is projecting inflation at 8.8% in 2022, to only come down to 6.5% during 2023.Historically, it’s a very high inflation rate. These are kind of rates we haven’t seen in nearly three-and-a-half decades. What is interesting is that when it comes to Indian inflation, it does not get overly-impacted by what’s happening globally. To that extent, we can still think about an inflation trajectory in India which is independent of global inflation.Global inflation could impact India in two different ways – one, tight monetary policies that are still being implemented in the US, Europe and elsewhere. It impacts the cost of financing as well as capital flows into emerging markets such as India. The other channel is through growth rates. So, when advanced economies increase interest rates, economic activity is likely to slow down. And that can impact the demand for Indian exports. S: One of the issues you talked about is exports. We have been seeing moderation in export growth. In fact, last month was a decline. In December, there was a decline in exports. The economic survey talks about a possible pressure on exports given that the demand in many parts of the world has slowed down. How critical is it to push exports in India, given that it forms a reasonably significant part of our manufacturing activity? And what are the steps that could be taken? PG: When we talk about exports, there are three kinds of things we export to the rest of the world – goods, services and labour. When we look at the dynamics of exports -- and take into account how the world and how India is doing in the global landscape -- goods export from India has not done too well in the last decade or so. If I use a slightly technical term, the elasticity of goods exports from India with respect to world demand, is close to 1. What do I mean by that? If the global demand for exports increases by a certain percentage, then Indian export grows exactly by that same percentage. The flip side of it is that if the global demand for goods export slows down, export of goods from India slows down as well. And that is what we have seen over the last decade, continuing into the last few months.The other side of this export story is the export of services. On that the global demand continues to be quite good and India is being able to more than leverage the global demand. Which means that services exports from India have continued to increase and India has increased its share in the global demand for services. A third aspect that has turned out to be good is remittances, which are directly related to the labour that we export from India, both skilled and semi-skilled. Here again India has done remarkably well. The World Bank has projected that this year, remittances to India will top $100 billion. India is the largest recipient of remittances globally and is going to retain that place.If we bring all these factors together, the export basket of India has not done badly at all. The two components have done very well but goods exports have not done as well. So, what can be done about it? Our experience and observations from around the world show that countries which have managed to do better, in exporting goods despite the global demand not being as resilient as in the past, have done a few things well.I am listing a few and there are many others that matter. Human capital is one thing. Both physical and digital infrastructure is another. Highly conducive business environment and being able to attract FDI into the country are other factors.All of these factors will matter for India to do better than it has done in the last decade in the export of goods. S: The Budget has also given a huge push to capital spending. The finance minister is banking on high capital expenditure or capex to keep the growth momentum going. Do you see private sector investment picking up in the economy? How critical is it for it to continue with this capex boost during the current financial year and maybe even in the next financial year?PG: Capital expenditure by the Centre has done well in the past three to four years. The share of capital expenditure in GDP has doubled from 1.7% in 2013-14 to 3.3% in the current Budget. When we think about the role that capital expenditure plays in the economy, infrastructure is a very important factor for the economy to do well both in production and exports of goods, services and agriculture.Another term that economists often use is “public good.” Infrastructure is a “public good” that everybody benefits from and its hard to charge individuals for it. It is a critical role that governments play in the economies that finance the infrastructure directly through fiscal accounts.And this is exactly the shift we are seeing in India. It is an important and welcome shift. Having said that, let’s also face the fact that total public investment in the economy is still a very small percentage of GDP. So, if you include public investment by the Centre, state governments and PSUs, it’s only about 7% of GDP. So, there’s only so much that the government can do through capex to steer the entire economy around.It is very important for it to provide the infrastructure but then there is no substitute for the economy to do well but to increase private investment as well, which is about 22% of GDP.Now, how can that come about? That is a bigger question. Capex helps in order to crowd in private investment but it is also equally important to have a highly efficient financial sector so that it can mobilise private savings and channelize it to the private sector.Also, when we think about investment, it is important to unbundle it into domestic investment and foreign direct investment (FDI). So, the areas which have done very well overall -- particularly in the manufacturing sector -- have been quite welcoming and have been able to attract FDI at a very large scale.The challenge perhaps would be to attract domestic and FDI and take away some of the impediments to private investment in the country. S: What could these impediments be?PG: Infrastructure build up that has started over the last three to four years, regulatory reforms which again were started a few years ago but are very much work in progress, skill formation as we can consider skill as a public good, on which there was emphasis in this Budget, attracting FDI, as domestic and FDI can complement each other and also connect in a bigger way with global markets.This is my list of things that need to be done in order to increase the share of private investment in the economy.S: On the revenue expenditure side, the Budget projects a modest 1.2% increase. The tax rate, the buoyancy, is assumed at around 1%. How feasible do you think it is for the government to achieve a fiscal deficit target 5.9% of GDP during the next financial year?PG: There are a number of different variables that feed into the fiscal deficit outcome variable. Revenue deficit, capital expenditure, and the denominator which is nominal GDP. When you put all these together, the 5.9% deficit target looks easily achievable and perhaps somewhat on the conservative side.I say this because nominal growth is likely to be higher. Then, the 10.5% that has been assumed in the Budget – both because the real growth rate of 6.5% that has been assumed is very reasonable but most likely inflation is going to be higher than 4%. So, if your nominal growth rate is higher than 10.5%, this deficit target would be easier to achieve.The other reason is the real assumption that is going into this deficit target is the decline in subsidies by about 0.7 or 0.8 percentage points of GDP. Here, experts believe that subsidies, which were increased, were during the pandemic were also due to higher prices globally of commodities. This fiscal year, both these will come down and therefore these will feed into making this deficit target highly attainable.My worry is not that it's an optimistic target. We can more than meet this. My worry is that this target is still very high. We as a country have among the highest levels of public deficit index within emerging markets and it is very hard to make progress both on the expenditure side and revenue side to get these deficit targets lower. So, 5.9% is attainable but going forward, as the Budget has predicted, further consolidation at the pace that has been projected would be important and needed for India to normalize its total deficit numbers.Audio production: Anil Chauhan