Growth Prospects in a Coalition Government
STORIES, ANALYSES, EXPERT VIEWS
The National Statistical Office (NSO) has estimated that India’s GDP grew 8.2% in 2023-24, outperforming all economic forecasters’ projections. This even surpassed NSO’s own advance estimates that had indicated a 7.6% uptick in GDP last year, imputing a 5.9% rise in the January to March 2024 quarter from 8.4% in the third quarter. However, the fourth quarter is now reckoned to have clocked 7.8% growth, than an upgraded 8.6% rise in the previous three months. Private consumption, writes Vikas Dhoot (Economics Editor, The Hindu) “a key metric that the revival of industrial investments hinges on, remained weak…”
Growth prospects for this year: a sedate start
In its latest monetary policy review earlier this month, the RBI has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. Initial indicators for the first two months of this year “suggest a sedate start. Industrial output growth slowed to a three-month low of 5% in April, as per data released on June 12. Goods and Services Tax (GST) collections, a proxy for consumption, surged to a fresh high of over ₹2 lakh crore in April, thanks to year-end compliances.”
A projected above-normal monsoon is expected to help farm output rebound and perk up the rural economy. ‘We expect GDP growth for 2024-25 to be around 7.3%-7.4%, with the base effect pulling down the growth,’ said Bank of Baroda chief economist Madan Sabnavis. Rating agency CRISIL’s estimate is a little lower than the RBI forecast at 6.8%, said its chief economist Dharmakirti Joshi.
Impact of a coalition government
There is a broad expectation of continuity in government policy, with top ministers unchanged, including Nirmala Sitharaman and Piyush Goyal at the helm of key economic ministries of finance, and commerce and industry, respectively. ‘We expect India’s strong medium-term growth outlook to remain intact, underpinned by the government capex drive and improved corporate and bank balance sheets. But upsides to medium-term growth prospects are likely to be more modest if reforms prove more challenging to advance,’ said Fitch Ratings director Jeremy Zook.
However, a government that needs ‘to rely more heavily on its coalition partners’ could find it tougher to push contentious reforms, particularly around land and labour, recently flagged as the party’s priorities, noted Zook.
Moody’s Ratings also said NDA’s relatively slim margin of victory as well as the BJP’s loss of its outright majority in Parliament 'may delay more far-reaching economic and fiscal reforms.’ Moreover, it has cautioned that the near-term economic momentum masks structural weaknesses that pose risks to long-term potential growth, such as ‘high levels of youth unemployment’, 'weakness in productivity growth' in India’s large farm sector that still accounts for 40% of all employment, and the decline in inward foreign direct investment (FDI) flows in each of the past three years.
What to expect from the Union Budget
Industry expects the Budget to address ongoing policy challenges such as reining in inflation, spurring consumption and investments, and untangling taxation issues.
The Finance Minister, who has recently voiced the need for Indian manufacturing to become more sophisticated and be part of global value chains, according to Dhoot “may also unveil some steps to catalyse this transition, including a reduction in some of India’s high import tariffs……” And “BJP allies like the Telugu Desam Party (TDP) and the Janata Dal (United) will, of course, expect some measures, or a package, to meet their aspirations for Andhra Pradesh and Bihar, respectively…”
The last few decades of India’s economic reforms story “show that coalitions have also been effective in driving critical and contentious changes, such as the privatisation drive kicked off by the Atal Bihari Vajpayee government. This Budget could reveal if this coalition-dependent government has a fresh and possibly more consensual approach in mind to deliver on India’s reform agenda.”
