Budget For Growth

Historically, every country that has risen from poverty to prosperity has reduced inequality and created jobs by focusing single-mindedly on economic growth. For Finance Minister Nirmala Sitharaman growth is the centripetal point around which all else in the economy revolves.

Clearly, 2023-24 is a politically loaded election cycle. Nine state assembly elections are due in 2023. The five key states are Karnataka, Rajasthan, Madhya Pradesh, Chhattisgarh and Telangana. With the Lok Sabha election due in April-May 2024, the Narendra Modi government will be tempted to focus on populist measures.

The Opposition has already got off the blocks. Several states ruled by the Congress and its allies, including Rajasthan, Chhattisgarh, Jharkhand and Himachal Pradesh, have pledged to implement the controversial old pension scheme (OPS) despite economists warning that it will lead to financial ruin.

Montek Singh Ahluwalia, a co-architect of the 1991 liberalisation policy and a confidant of Dr Manmohan Singh, called the OPS an “absurd idea” and “a recipe for financial bankruptcy.” But emboldened by Congress leader Rahul Gandhi’s endorsement of the OPS, state leaders like Rajasthan Chief Minister Ashok Gehlot have dismissed the criticism.

While the Modi government will eschew financially disruptive populist schemes like OPS, it will double down on welfare benefits in a critical election cycle. The government’s priorities post-Budget must be to rapidly deploy resources towards the PM Gati Shakti Master Plan. It has the same transformative potential on infrastructure as digitalisation has had on ecommerce, e-payments, direct benefit transfer (DBT) of subsidies, online banking, health insurance, edtech and fintech.

Early estimates by the National Statistical Office (NSO) project GDP growth in 2022-23 at seven per cent. That is higher than the earlier estimates by the Reserve Bank of India (6.8 per cent) and the International Monetary Fund (6.9 per cent). And yet, the prime minister is aware that several endemic problems need to be fixed. One of these is over-regulation by statutory authorities. Addressing a conference of chief secretaries in New Delhi on January 7, 2023, Modi cautioned against “mindless compliances” and “over-regulation”.

It’s important to examine the past in order to not repeat old mistakes. Discussing his new book, India is Broken: A People Betrayed, 1947 to Today, Ashoka Mody, a visiting professor in international economic policy at Princeton, said in an interview with The Times of India on January 8, 2023 that India’s first prime minister, Jawaharlal Nehru, blundered by embracing socialism. “When India became free,” he pointed out, “7 per cent of people worked in low-productivity agriculture, and creating jobs was a primary objective. Nehru set a target of full employment in 10 years. He understood education was poor and graduates coming out were relatively worthless. Nehru’s diagnosis was correct.

“What Japan did was to build textile mills and small and medium-sized factories that could absorb labour. India needed exactly that and had pre-conditions for it, with towns like Ludhiana (known for textiles/knitwear/shoes), Surat (silver thread/jari), Coimbatore (textile/light engineering products), where small/medium sized firms could have been given a boost. Instead, Nehru pushed heavy industry. He knew it wouldn’t create jobs, but the presumption was a spillover effect would create prosperity and employment. Primary education was neglected. I went to an IIT so I am a beneficially of the Nehruvian policy, but not everyone is like me. How many didn’t go to primary school, and with what intergenerational consequences?”

Indira Gandhi continued India’s path on Nehruvian socialism in the 1960s and 1970s. Developing countries in Southeast Asia meanwhile followed Japan’s example. It was not till 1991 that India finally took the right fork in the road. But the lost 44 years since 1947 cost India dearly. Economic growth crawled at three per cent a year, less than half the rate of South Korea, Malaysia, Singapore, Taiwan and other Southeast Asian countries. Their per capita income had been broadly similar to India’s in the 1950s. By the 1980s, they had leapt ahead, creating prosperous societies and all but eliminating poverty.

As Ashoka Mody noted: “Nehru saw early on that the Japan model was right and mentioned it in a 1949 letter to CMs. But the global intellectual climate was for big industry and he nixed development of small/medium-sized firms. Towards the end of the 1950s, there was an opportunity to change course. That’s when Taiwan changed course, and the Koreans too got into labour-intensive exports. Both built fertiliser factories and power and steel plants, but also small firms exporting shoes, garments, etc. This opened up a vast international market which, in turn, created jobs on a large scale.” 

One of the byproducts of a digital economy is the inequality it creates between those with access to the latest software tools – ranging from data analytics to ChatGPT – and those struggling to make a living bereft of the advantages of a world increasingly focused on devices embedded with artificial intelligence (AI).

President Droupadi Murmu emphasised this during a recent speech at the seventh Digital India Awards. “Data is the cornerstone of creating new knowledge, insights and thus solutions,” she said. “It leads to whole new fields of application. We should focus on democratising the use of government data so that young technology enthusiasts can use it to build local digital solutions.”

The key word is “democratisation”. Beyond the 2023-24 Union Budget, India must seize the opportunity that it did not in the 1950s. In education, for example, the task is to build a hybrid model that combines primary schools with institutes of “eminence”. The digital era gives India the opportunity to make up for two generations of lost economic opportunity.

Post-Budget the Modi government will have to deal with several key pressure points. Merchandise exports have slowed. The current account deficit (CAD) has ballooned. The Balance of Payments (BoP) in 2022-23 is likely to be negative despite record inward remittances of $100 billion and relatively strong services exports. Foreign direct investment (FDI) too has held up well. So has foreign portfolio investment (FPI) despite continuing global economic turbulence.

After three years of an economic train wreck in the form of the Covid-19 pandemic, a war in Europe and worldwide recession, India has emerged relatively unscathed. The time for rebuilding starts now.