The economic indicators listed in the monetary policy statement of the Reserve Bank of India, raising the repo rate to 6.5 per cent from 6.25 per cent on February 8, is sobering after the high rhetoric used by finance minister Nirmala Sitharaman in her Budget speech on February 1.
The MPC statement shows that inflation remains an issue of concern, something that the finance minister refused to take into account in her Budget. It is a known fact that the Budget speech is not an economic but a political statement, and Ms Sitharaman followed the rulebook by talking about increased allocations to projects and announcing new projects. That is indeed the bread and butter of all governments -- making promises. It is left to the RBI and to its Monetary Policy Committee (MPC) to look at the actual numbers. So, here are the numbers.
Growth in 2022-23 is expected to be seven per cent and inflation for the same period will be at 6.5 per cent, and that is not a pretty picture. And the growth for 2023-24 is estimated to be 6.4 per cent, while the inflation rate will be at 5.3 per cent. The numbers are positive but not rosy and bright.
The revenue buoyancy of the government, especially from the Goods and Services Tax (GST) front, seems to be under stress, if not actual trouble, though the monthly collections have been much above the slated Rs 1 lakh crore, when the finance minister announced at the end of the 49th GST Council meeting in New Delhi on February 18 the release of the compensation due to the states of Rs 16,982 crores for June immediately from the Centre’s own resources as the required amount was not there in the compensation fund. Of course, fund adjustments are common and it is not something to cavil about.
But it does indicate that the adjustment blues of the nearly five years-plus GST regime still lingers. Of course, we have to remember the two-year Covid-19 interruption in 2020 and 2021.
Some the decisions to relating to GST rates show that the anomalies and irrationalities of the Indian tax regime abound. For example, the council has reduced the rate on liquid jiggery from 18 per cent to five per cent if it is pre-packaged and labeled, and nil if it is sold without any modification.
One is left wondering at the 18 per cent rate that had been imposed in the first place, and the steep reduction on second thoughts. The more ridiculous one is the reduction of the rate for pencil sharpeners from 18 per cent to 12 per cent, when one would have assumed that what is of general use by school students should have a zero tax rate in the first place. Of course, it is futile to quibble about the details of tax rates beyond a certain point because it is one of missing the woods for the trees.
But it does indicate that unless India becomes a less-taxed country it would not attract businesses, both domestically and from other countries. If the domestic market is large, then reasonably small rates would bring in handsome collections.
But what we have been witnessing is a tax-hungry Narendra Modi government with its robust tax collections, despite the economy’s low activity. The GST Council deliberations show that many things remain to be sorted out on the tax front if India is to be the competitive place for business that it aspires to be.
Ms Sitharaman had been addressing industry and business bodies in various parts of the country, emphasising the role of the states for the overall growth of the economy, asking the private sector to grab thr opportunities that she feels the Central government has created. But somewhere in all this there is a glimpse of anxiety about growth and how it is to be achieved and maintained. The big numbers of the economy are satisfactory, but not too bright. Apart from inflation, there is the fear of a lurking global recession and how India is to respond to it.
The management experts from America -- the paradise of economists and management gurus -- are telling Indian private sector companies that they should turn the global recession into an advantage, hire professionals being laid off by the global tech giants, and even buy companies whose prices are falling because of the recession, and thus position themselves for the expected upturn in the business cycle, as it were. It is not advice that cost-sensitive, capital-scarce Indian private sector companies are likely to embrace.
As Ms Sitharaman and RBI governor Shaktikanta Das get ready to address the conference of G-20 finance ministers and central bank chiefs in Bengaluru on February 24, it will not be possible for Ms Sitharaman tell her G-20 counterparts that India is in an advantageous position economically when other countries are facing a looming crisis. India also cannot argue that a growing Indian economy will boost global economic growth. India is not yet in a position to do so.
Indian investments abroad and foreign investments in India seem to be at relatively low levels. The net inward FDI for April-December 2022 is at $22.3 billion, compared to $24.8 billion a year earlier. And foreign direct investment by India for April-December 2022-23 is at $10.15 billion, compared to $14.16 billion in April-December 2021-22.
The Narendra Modi government would want to persist in projecting an upbeat picture of the nation for its own sake -- because there is the Lok Sabha election in 2024 -- and also as a way of pepping up the spirits of the Indian private sector. The people with money -- and the Indian middle class is a moneyed class compared to the middle class before the 1980s -- seem to be on a spending spree.
The question is whether the Indian economy can spend its way back to growth and prosperity. It would have been better if the government and the economy stakeholders came out in the open and talked about the challenges. Increased capital outlays by the government can only be a partial answer to the situation where India and much of the world is struggling to cope with slow economic growth.