India’s challenge has shifted from inflation management to facilitating growth in 2023

India’s challenge has shifted from inflation management to facilitating growth in 2023

The Modi government’s focus on improving the country’s physical as well as digital infrastructure ought to have given added impetus to investment. But on the ground, neither domestic nor foreign companies are really investing.

The new year begins on a slightly more optimistic note for India. Global crude and food prices are roughly 38 per cent and 15 per cent down respectively from their highs in March, following Russia’s invasion of Ukraine. The rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022, even as official foreign exchange reserves, which had plunged to $524.5 billion on October 21 from a year-ago peak of $642 billion, have since recovered to $562.8 billion. With the prospects for the upcoming rabi crop looking good — thanks to favourable soil moisture conditions, timely onset of winter and improved fertiliser availability on the back of declining international prices — one can expect consumer inflation to ease further. This, after falling below the Reserve Bank of India’s (RBI) 6 per cent upper ceiling target in November for the first time in 11 months.

The challenge for India this year is likely to be more on the growth than on the inflation front. On paper, the world’s disillusionment with China (more specifically, the authoritarian policies of Xi Jinping, both at home and beyond) and its diminishing economic prospects, worsened by a looming demographic crisis, should be making India every investor’s favourite destination. The Narendra Modi government’s focus on improving the country’s physical as well as digital infrastructure — plus schemes such as production-linked incentive to attract investments in specific sectors, from solar photovoltaic modules and drones to specialty steels — ought to have given added impetus to this process. But on the ground, neither domestic nor foreign companies are really investing. The biggest drag on investment during the last decade was over-leveraged corporates and bad loans-saddled banks. That “twin balance sheet” problem has more or less resolved itself. Today’s problem has mainly to do with strained government and household balance sheets. That, coupled with a deepening global slowdown constricting export demand, could have a bearing on India’s economic growth.

What should the Modi government do? It should certainly refrain from any fiscal stimulus to kick-start investment or drive growth. Far from stimulus, what the country needs is macroeconomic stability and policy certainty. The current fiscal deficit and public debt levels are far too high to allow any new populist schemes in the name of putting money in people’s hands or sharp tax cuts to supposedly revive investor sentiment. Large government deficits will invariably spill over into current account deficits. The latter number, at 4.4 per cent of GDP in July-September, was the highest for any quarter since October-December 2012 — and the prelude to the last so-called taper tantrum-induced balance of payments crisis. India cannot afford a repeat of that. The coming budget must prioritise fiscal consolidation. This will enable the RBI to also pause interest rate hikes and further monetary tightening, which is probably not the best thing for an economy already facing multiple growth headwinds. Policy stability and credibility should be the mantra that will ultimately work for India.