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Revving Up Growth Engine

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Nirmala Sitharaman, 

Union Finance Minister
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On July 23, International Monetary Fund raised its 2023 growth forecast for India by 20 basis points to 6.1%. This is likely to make the country the world’s fastest-growing big economy at a time when almost all big countries are growing in low single digits amid headwinds such as runaway inflation and sky-high interest rates. This is no small achievement for the person at the helm of it all—Finance Minister Nirmala Sitharaman—who has been deftly steering the Indian economy through one of its most difficult phases in decades. After all, she inherited a slowing economy in 2019 with GDP growth touching 3.7% in FY20, only to be battered further by the pandemic (GDP shrunk 6.6% in FY21). The seeds of India’s stellar performance over last few quarters were sown in the way Centre designed its response to Covid-19. To avoid inflation, the relief measures gave minimal demand push and instead focused on supply-side reforms (to push growth) and bringing relief to the poorest of the poor. This standout strategy was distinct from the entire western world. It spared India the scourge of runaway inflation of the kind that is breaking decades-old records in west. Still, food and retail inflation averaged over 6% in FY23, mainly due to Russia-Ukraine war that disrupted supplies and triggered a commodity price spiral. RBI, too, started raising rates in May last year. This presented a new challenge—ensuring fast growth amid rising inflation/interest rates and restricted exports on account of global slowdown.
Sitharaman’s efforts to steady the economy hinged on implementing a massive programme for building public infrastructure and spending on welfare of those at the bottom of the pyramid. After ensuring absorption of ₹7.5 lakh crore capital outlay in FY23, she allocated ₹10 lakh crore under the head for FY24. She is front-loading spending to ensure that its multiplier effect kicks in as quickly as possible. In April and May this year, government capital expenditure was ₹1.68 lakh crore (17% of FY24 Budget estimate), significantly up from ₹1.07 lakh crore in April and May last year. The aim is to crowd in private sector investments, an economic engine that has remained largely silent over the last couple of years. Chief Economic Advisor V. Anantha Nageswaran says private sector investment revival is already visible.
While doing the heavy lifting, government did not lose sight of inclusive development goals. Anticipating the need to ensure a healthy fertiliser supply chain in the wake of the Russia-Ukraine war, it enhanced FY23 fertiliser subsidy to ₹2.55 lakh crore from original allocation of about ₹1 lakh crore. Urea prices remained unchanged throughout the year. Other initiatives in last one year include additional relief to small and medium enterprises, facilitation of jewellery exports and pushing credit offtake. In order to sustain growth and help stressed sectors, the government, in August last year, approved enhancement in limit of the Emergency Credit Line Guarantee Scheme from ₹4.5 Lakh crore to ₹5 Lakh crore. The additional amount was earmarked exclusively for hospitality and related sectors, which were struggling even two years after the pandemic. Government had sanctioned close to ₹3.75 lakh crore under the scheme till March this year.
Conscious that the economy needed heavy government spending, Sitharaman initiated several revenue augmentation measures as well. One such step involved utilising opportunities arising out of the Russia-Ukraine war in the form of high crude oil prices. With effect from July 1 last year, government imposed a cess of ₹23,250 per tonne on crude oil. The reason was windfall gains by domestic producers as they sell crude oil to domestic refineries at international parity prices. The cess did not have any impact on retail prices of petroleum products. Here, too, special care was taken of small and medium players—those whose annual production of crude oil in preceding financial year was less than two million barrels were exempted from the cess. Government kept the levy dynamic during the year, adjusting it to movement in crude oil prices. It also imposed a cess of ₹6 per litre on aviation turbine fuel. The measures generated additional revenue of ₹58,750 crore in FY23.
Then, in the middle of last year, gold imports surged, putting pressure on current account deficit. Government increased customs duty on gold from 10.75% to 15%. Also, in a move likely to push consumption, the finance minister announced further simplification of the concessional tax regime with zero tax on annual income up to ₹7 lakh.
The efforts have borne results. GDP grew 7.2% in FY23 and India remains one of the fastest growing major economies in the world. It replaced U.K. to become the fifth-largest economy. The country is no longer content with its target of becoming a $5 trillion economy. It has now set its sights on growing into a $30 trillion economy by 2050. There will be short-term challenges along the way. The imminent one, of course, is inflation, which is far from over and will continue to test the finance minister’s skills.