Four Economic Trends That Will Impact India

The Budget reflects the shift globally in government capital expenditure, inflation, fiscal deficit and globalisation

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There are four broad trends that will impact the Indian economy in the years to come. The Budget for 2023-24 affirms these trends. Government capital expenditure will drive the economy in the medium term: The latest Economic Survey underlines the fact that government capital expenditure has risen from a long-term average of 1.7 per cent of gross domestic product (GDP) in the period FY09 to FY20 to an estimated 2.9 per cent of GDP in FY23. The latest central Budget expects capex to rise to 3.3 per cent of GDP in FY24.

This points to an inconvenient fact: Private investment has remained sluggish and the government has had to compensate.

The behaviour of private investment is not unique to India. It is part of a trend that is seen in emerging and developing economies (EMDES). As the World Bank's Global Economic Prospects (2023) points out, investment growth in EMDES in 2022 remained about 5 poroontego point average, and below the 2000-2021 nearly 0.5 percentage point below in EMDES, excluding China.

The World Bank does not see private investment returning to the level suggested by the pre-pandemic trend through 2024. It lists several factors responsible for the slowdown in investment growth in EMDES: Slower output growth in 2010-19; lower commodity prices; lower and more volatile capital inflows to EMDES; higher economic and geopolitical uncertainty; and a substantial build-up of public and private debt. Many of these factors apply to India.

The government sees a sharp rise in capex in FY24 as boosting output growth. This overlooks the fact that the fiscal deficit is projected to decline by 0.5 per cent of GDP in FY24. We have a withdrawal of something that is contractionary in nature.

True, the composition of expenditure has shifted even more towards capex, and this is expansionary.