Steady Hands at the Helm

IF THE PAST YEAR IS ANY INDICATOR, the Indian economy is poised to repeat its strong performance in 2024 as well. From growth to management of infla­tion and from continued focus on build­ing physical infrastructure and rising investment—public and private—the Indian economy is likely to sail through the choppy waters of the global economy with aplomb.

Depending on one’s state of optimism, the Indian economy is expected to grow anywhere from 6.3 per cent to 7 per cent in 2023-24 and in the 6.3+ range in 2024-25 as well. The Interna­tional Monetary Fund (IMF), in its Article IV consultation with India, pegged its estimate of India’s economic growth in 2023-24 and 2024- 25 at 6.3 per cent in both years. The Reserve Bank of India’s (RBI) Monetary Policy Commit­tee (MPC) in December 2023 pegged real GDP growth in 2023-24 at 7 per cent. The median forecast for growth in 2023-24 in the latest edi­tion of RBI’s survey of professional forecasters was pegged at 6.4 per cent. The “buff” state­ment—a response of India’s executive director at IMF to the Fund’s Article IV estimates—gave a more upbeat estimate of the Indian economy and its likely performance in the next two years.

Similarly, the fight against inflation that began in 2021 is now bearing fruit. In these two years, RBI has been firm in its handling of inflationary pressures and there is a possi­bility that the first cuts in the central bank’s policy rates may be carried out this year. In these years, the central bank and the finance ministry had a tough task to ensure price sta­bility and steady growth even as the global economic environment remained uncertain. Economic uncertainty at the global level is likely to persist as wars rage in different the­atres. In 2021, the conflict in Ukraine was one problem; in 2023, Israel’s war with Hamas in Gaza added to these uncertainties. At the end of 2023, shipping lanes in the Middle East came under threat from rebels in Yemen whose at­tacks drove away even the hardiest shipping companies. These events are likely to exact an economic toll on the global economy.

Domestically, India’s economic perfor­mance on many fronts—tax collections, creation of physical infrastructure, and en­hanced welfare measures—has continued apace. Goods and Services Tax (GST) collec­tions have continued to be robust even as direct tax collections are now on an upward trajectory. These have imparted resilience to the Indian economy.

These positive developments are likely to fuel India’s crossing of a key threshold as it marches towards becoming a $5 trillion economy. It is likely that it will cross the $4 trillion mark in 2024. In 2023, the size of the Indian economy was estimated at $3.7 trillion in nominal terms. By 2030 India is expected to become the third-largest economy in the world behind the US and China.

These are not ordinary statistics as many economists as­sume them to be. Nor are they mere markers along India’s path towards becoming a great power. The reality is that in per capita terms India remains a relatively poor country. If its citizens are to achieve better living standards and enjoy the fruits of development, the government needs to invest in multiple sectors, ranging from infrastructure, healthcare, and education to livelihoods. That requires walking on a knife’s edge: the size of the economy needs to be sufficiently large to have enough surpluses for investment even as the current consumption needs of the poor and needy citizens are met. If too much is redistributed away, there will be little left for investment; if the consumption needs of the masses are not met, the political conditions for growth will disappear.

In 2024 India appears to be in a sweet spot to meet both conditions. This, even as the country faces serious external un­certainties on all fronts: exports are increasingly tougher due to war and generally turbulent global economic conditions while prices of key commodities like oil remain elevated. But a deft combination of fiscal and monetary measures has kept the economy on an even keel. There is no reason to doubt that a repeat performance is not possible in 2024. If anything, the government’s economic managers are on the job already.

IN NOVEMBER 2019 Prime Minister Narendra Modi spoke about making India a $5 trillion economy by 2024. He outlined this aspiration during comments made to leaders at a BRICS summit. A year earlier, India’s economic pie stood at $2.6 trillion and the $5 trillion goal seemed eminently feasible. A year later, at the height of the Covid pandemic, the goal seemed more of a dream than an actual plan to speed up the economic fortunes of a 1.3 billion-strong country. By then the usual political carping and questioning by econo­mists had begun. The latter questioned the rationale—and some even the need—for a $5 trillion economy. In their oth­er-worldly models, these economists assumed that India’s economy would reach that target on its own and there was nothing special about the five trillion figure. All that needed to be done was some ‘reforms’ and the government ‘getting out of the way’ for attaining that goal.

The combination of economic growth and government intervention is likely in 2024 and beyond as well. They form a virtuous cycle: higher growth powers state capacity and that, in turn, allows rational intervention when the economy needs it

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What was forgotten was that the world did not exist any­more. After the 2008 global economic crisis and the steady rise of protectionism by 2016, it was obvious that the government had a role to play in ensuring higher growth. This was not a return to the 1960s and 1970s kind of state interventionist system but keeping a watchful eye over economic interests and intervening when necessary. A recent example from 2023 illustrates the issue. India’s much-maligned imports of oil from Russia are a case in point. Until a decade ago, India was a net ‘taker’ in any market for key raw materials and inputs like oil, fertilisers, and other commodities. Even a $10 per bar­rel increase in the landed price of crude oil would shave off a significant fraction of economic growth. But the govern­ments of the day, hobbled by their inability to take decisive steps, watched helplessly as external shocks wreaked havoc on the Indian economy. In 2022, India saved an estimated $4 billion by purchasing discounted Russian oil while in the first nine months of 2023-24, it saved approximately $3 bil­lion. The real values may be much higher as the exact pricing and consumption are harder to calculate. But these savings are only one part of the economic pain-or-gain calculation: higher landed prices lead to an inflationary upswing in prices, forcing the central bank’s hands. The second-order effect is a squeeze on credit and in turn a negative effect on growth. It is worth noting that in India, the ‘core’ of the Consumer Price Index (CPI)—which excludes items with volatile prices like fuel and food—is just 47 per cent compared to much higher weights for other emerging economies. Normally, this means that monetary policy has little control over checking infla­tion as monetary tightening only affects ‘core’ prices. But in India, the spillover from core prices to a generalised price increase keeps RBI on its toes. The import of Russian oil not only helped save money but also gave a helping hand to RBI.

This combination of economic growth and government intervention is likely in 2024 and beyond as well. In present times, they form a virtuous cycle: higher growth powers state capacity and that, in turn, allows for rational intervention when the economy needs it. The secret sauce of economic growth and stability in India is a newfound pragmatism that eschews ‘fundamentalisms’ of all kinds, whether they are un­fettered free markets or a return to the dirigisme times of the last century. The ‘ideology’, if that is an appropriate word here, is simple: clear the road blocks that come in the way of eco­nomic growth. Nothing else matters for the India of today.

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Siddharth Singh

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