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Informist, Wednesday, Jan. 29, 2025

 

By Krity Ambey and Priyasmita Dutta

 

NEW DELHI – When most economists have been recommending ways for the government to deploy fiscal policy to revive India's slowing growth, Chief Economist at Crisil Ltd. Dharmakirti Joshi has a slightly off-beat prescription. He believes that the upcoming Union Budget for 2025-26 (Apr-Mar) can best serve growth by addressing the problem of food inflation and creating room for monetary policy to turn accommodative.

 

As India's GDP slumped to a seven-quarter low of 5.4% in the September quarter, the National Statistical Office projected a growth of 6.4% for FY25 in its first advanced estimate. In an interview with Informist, Joshi said the slowdown was partly attributable to a restrictive monetary policy.

 

"This slowdown is partly a result of higher interest rates and tighter credit conditions," Joshi said, adding that the high interest rates have affected urban demand. "When interest rates rise, the urban economy gets hurt more."

 

High food prices restrict the Reserve Bank of India's ability to cut interest rates, even though monetary policy has no control over food inflation, Joshi said. "Budget can certainly put more money on the table for things like food processing, development of climate resilient crops, development of cold chains," Joshi said. Finance Minister Nirmala Sitharaman will present the Budget for FY26 on Saturday.

 

The RBI's Monetary Policy Committee has stayed pat on interest rates since April 2023 as high food prices have made it difficult for the headline inflation print to align with the target of 4%.

 

Joshi expects urban demand to improve as he believes that the MPC is poised to lower the interest rates. "We do expect the central bank to cut rates in February because food inflation is now heading down, and core inflation remains quite soft," the economist said. India's food price inflation cooled to 8.4% in December from 10.9% in October.  

 

FISCAL FIX

While the Budget has "limited ability" to rev up growth, considering it has to do a "balancing act" between fiscal prudence and public spending, Joshi said employment generation and infrastructure creation is the "best and sustainable route" that the government can take to create demand in the economy.

 

A long-term solution towards creating durable demand is raising employment in the economy, Joshi said. "Eventually you have to raise the ability of people to afford these items and that can only come through employment," he said. In the Budget for FY25, Sitharaman had announced three employment-linked incentive schemes as part of the prime minister's package. 

 

Meanwhile, in a bid to quickly address the discontent from economic woes, many state governments have rushed to give cash transfers to certain sections. Joshi said that while such schemes give near-term support, in the long run, they are neither sustainable nor do they provide a solution. Instead, the government needs to create an environment of opportunities so that people can productively participate in the growth process. Focusing on employment-intensive sectors like textiles, leather and a variety of services and bridging the "huge gap" in skilling in vocational areas will help, he said. "These solutions will also reduce the dependence of people on government transfers," he added. 

 

Beyond employment, Joshi said the government should continue to prioritise infrastructure through budgetary spending. Prime Minister Narendra Modi's government has been riding the capital expenditure wave in the post-pandemic years to revive growth and crowd-in private investments. In the last five years, the government has more than tripled its capital spending.

 

However, there are concerns about the government's public spending facing limitations due to lack of avenues. The government's capital expenditure in FY24 fell short of target by over INR 500 billion, and it is also expected to fall short in FY25 by INR 1.0 trillion-INR 1.5 trillion, from the budgeted estimate of INR 11.11 trillion. 

 

Joshi recommended that beyond allocating funds for infrastructure spending, the government needs to ensure that the projects are shovel-ready, there are no cost and time overruns and capacity building is enhanced. "If you do these things, you can continue to increase capex and do it more effectively." For FY26, he sees the government projecting capital expenditure growth higher than the nominal GDP growth. This means capital expenditure will be one of the leading drivers, he said. According to an Informist poll, the government will likely peg FY26 nominal GDP growth at 10.5%. 

 

Though the government's public spending push was to crowd in private investments, a broad-based pick-up in private corporate investment is not visible as yet. According to him, the corporate sector is in a position to invest, but it is "in a very cautious mode" due to uncertainty in the system, partly stemming from global factors like the tariff wars which are expected to accentuate. On top of that, domestic demand has also been uneven and fluctuating. 

 

Joshi said that the government's push for industrial policy through production-linked incentive schemes along with corporate tax cuts announced in FY20 should encourage the private corporate sector to invest. A demand revival, along with clarity on import tariff policy will also help private corporate sector decision-making, he said.  End 

 

Edited by Akul Nishant Akhoury

 

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