High Spirits

A NATIONAL ASSOCIATION OF SOFTWARE and Service Companies (NASSCOM) delega­tion, the association that represents India’s tech industry, which met Union Finance Minister Nirmala Sitharaman recently, had bullish news to share with the government. India’s big push to promote digital transformation and rapid adoption of IT-driven business practices is bearing fruit. Attracted by revenue prospects and a supportive infrastructure, an increasing number of global data centres are being located in India. The data centre market is growing at an explosive rate with estimates that the market will touch $10 billion by 2027 from $4.35 billion in 2021. A NASSCOM report pegs cumulative investments in the data centre market at around $28 billion over 2019-25. The trend of investments by major Indian and foreign companies reveals that large metropoli­tan areas like Bengaluru, Mumbai, Chennai and Hyderabad, and more recently Noida, are benefitting from the expanding market.

The mood in the finance ministry is upbeat despite the uncer­tainties of the Ukraine war, slower global growth, and concerns about the progress of the monsoon. While factoring in likely downsides, the government is drawing succour from the positive reading of several parameters. There’s buoyancy in tax collection, with gross direct tax collections growing at 12.7 per cent in financial year 2023-24 and indi­rect taxes rising as well—the Goods and Services Tax (GST) crossed `1.57 lakh crore in May. The encourag­ing economic data is being seen as evidence of stable and consistent growth, with businesses investing in capacity-building while govern­ment processes increasingly shut down tax loopholes and evasion. Powerful algorithms and sharing of information have led to Central agencies honing in on illegalities with pinpoint accuracy. Their actions no longer resemble fishing expeditions and the deterrence value of tech­nology is slowly but surely proving itself. With retail inflation inching downwards to a two-year low of 4.25 per cent and the annual rate of inflation based on all-India wholesale price index (WPI) reading (–)3.48 per cent for May 2023, the economy looks good. In fact, the view inside government is that India could be set to enter a new growth paradigm of sustained, steady and multi-dimensional growth.

The fiscal 2022-23 growth rate of 7.2 per cent, a better than expected result, is viewed as vindication of key decisions taken by the government with regard to economic management. Taking note of the concern that private consumption remains slack, government officials argue that the situation should not be seen in a segmented manner and this might not lead to ac­curate assessments. Higher sales of top-end cars, for example, are not a reflection of just the premier market alone. These sales sustain a vast network of engineers, technicians, call-centre workers, and even pick and drop drivers at workshops. Simi­larly, Chief Economic Advisor (CEA) V Anantha Nageswaran’s comment that India could be set to grow at 6.5 per cent for the rest of the decade needs to be seen in context, officials said while responding to Congress leader and former Finance Minister P Chidambaram’s remarks that this is an admission of “modest growth”. No other major economy had clocked a 7 per cent-plus growth in a difficult year when the post-Covid recovery was further hampered by the Ukraine war and it was important to consider that the situation could well have been very different. Several national economies were in a shambles, including those in the eurozone witnessing stubborn and high inflation. The remarks of opposition leaders fail to acknowledge that prescrip­tions to print more currency or spend more on doles would have led to surging inflation as in the US in the aftermath of three succes­sive multi-billion dollar stimulus infusions.

Will the revenue buoyancy and the electoral loss in Karnataka lead to a turn towards populism? That does not seem likely. Prime Min­ister Narendra Modi, in a speech in Rajasthan soon after the Karna­taka results, indicated that he does not see any reason to revise his ad­vocacy against “revadis (freebies)” as opposed to more concrete mea­sures to alleviate poverty. Though the Bharatiya Janata Party (BJP) is examining the reasons for its electoral defeat, it is felt that Kar­nataka, along with states like Rajasthan and Punjab, has a strong history of showing incumbent governments the door. While the reasons for popular anger need to be evaluated, it would not be useful to go in for any significant change of course due to the electoral setback alone. The prime minister’s view that populist “guarantees” offered by Congress are inherently unsustainable will guide BJP’s policies. Reports from Karnataka about a sharp rise in electricity bills and problems in procuring additional foodgrains to fulfil poll pledges bolsters this assessment. Give­aways like free power and water or free bus and train rides come at the cost of meaningful development. Recipients of such largesse lose the right to demand better infrastructure and many voters may have to fork out money for the goodies on offer.

Rather than tweaking any scheme, the Modi government  will continue to pursue “saturation” of benefits, ensuring that a maxi­mum of eligible persons are covered before the next General Election. The success of Ujjwala, Swachh Bharat and PM Awas schemes has encouraged planners to place their faith in initiatives that result in as­set creation and improved incomes. Qualitative changes like replacing wood-fired stoves with cooking gas, or providing better sanitation, improve health and consequently reduce medical expenses. A roof over the head is a tangible asset and allows people to consider additions to their homesteads, such as sheds for cattle, poultry or sheep. The schemes announced in the Union Budget, such as the Vishwakarma Yojana intended to provide tradi­tional craftspersons with finance and skilling, are expected to be rolled out soon. It is not a coinci­dence that many Vishwakarma communities, who work with their hands, belong to the Other Backward Classes (OBC), sections that have gravitated towards BJP and whom the prime minister has worked hard to woo. The higher revenues might tempt the govern­ment to set more daunting infra­structure targets as it feels that the decision to rely on Centrally driven capital expenditure has paid off, generating employment as well as encouraging private businesses to invest in growth. Will voters consider arguments that populist promises can come at a steep cost or may even result in non-delivery? BJP managers will give it more careful thought in the months ahead even as no big reset is on the cards.

INFLATION IS A serious bugbear that ruins the best of plans and while it is currently under control, the monsoon’s ad­vance will be closely watched. As of now, the India Meteo­rological Department (IMD) is sticking to its forecast of normal rainfall and while the accuracy of the prediction remains to be seen, slower global growth is expected to hurt merchandise export baskets linked to the manufacturing sector. Progress on privatisation and asset monetisation is admittedly slow, mainly as the government works its way through evaluations and frames rules carefully, mindful of the legal and political factors. The pri­vatisation of Air India had been on the table for several years but the sale happened only in Janu­ary 2022, after several false starts. Even though reforms and profit­ability of the public sector were being prioritised, the Centre was spending `16 crore a day to keep the airline afloat. Rushing initia­tives with significant financial implications can invite criti­cal comments from oversight bodies like the Comptroller and Auditor General of India (CAG)—something the gov­ernment is very keen to avoid. Despite the risks to growth, the finance ministry is optimistic about the economy and a key reason is the preparedness of Indian businesses to embrace digitalisation and emerging technology like AI and 5G. The adoption of newer technology, better skilling and the rising graph of digital payments are reducing frictions and increas­ing efficiencies in the economy, the full effects of which are yet to manifest themselves.

The resilience and bounce in the Indian economy in no small measure rests on the suc­cess of India’s Covid vaccina­tion programme and the abil­ity to domestically produce a range of vaccines. The journey from the record (-)23 per cent contraction in the April-June 2020 quarter to 7.2 per cent growth saw the government building on the confidence generated by homemade vaccines blunting the third (January-March 2022) and fourth (March-April 2023) waves of the pandemic through aggressive capital expenditure, targeted welfare programmes, and a range of incentives for the private sector like the Production Linked Incentive (PLI) and special efforts to create favourable ecosystems for startups and sectors like semi-conductors. The wider spread of the growth story has helped sustain employment across a range of sectors, particularly in the informal sector where jobs can be lost sud­denly as a local contractor’s contract is terminated or not re­newed. Higher revenues and a comfortable foreign exchange situation provide the government with the leeway to offer emergency interventions as it did during the pandemic and also, as the current chair of G20, take up the case of the distressed economies of the global south.

GDP growthIndian economymonsoonNirmala SitharamanUkraine crisis