By Dr. Gyan Pathak
It would be pleasing to hear that India is set to be the second-fastest growing economy in the G20 in 2022-23, despite decelerating global demand and tightening of monetary policy to manage inflationary pressures, but the harsh reality on the ground can’t be wished away. New challenges are knocking at the doors that can be tackled only by considerably increasing public investment, since private sector would be facing greater challenges.
The challenges before the Union Budgets 2023-24 are obvious. GDP at market prices, as has been projected by OECD, is likely to decline for the third consecutive year to 5.7 per cent in 2023, from 8.7 per cent in 2021, and 6.6 per cent in 2022. Moreover, there is downside risks due to a range of international and domestic issues. With lower growth rate, financials position is set to deteriorate that would limit the availability of funds with both the government and the private sector.
Gaps and challenges in the usage of financial services are still considerable. For example, roughly a third of the people’s bank accounts are inactive, private sector has not enough money to considerably increase their investment, and increase in investments by the private sector are announced chiefly in those sectors that are getting incentives from the government. Commercial banks have been too cautious to finance projects, especially after a spate of scams and investigations into them leading to actions against bank officials. There is not any possibility of any large scale private investment in coming months. Therefore, increasing public investment seem to the only option left with the government to overcome the new known and unknown challenges to India’s growth narrative.
Corporates have almost free ride in their profitability was offered by high commodity prices, low leverage, and low interest rates. The situation has now changed. Higher prices and higher interest rates have increased their cost of investments and production which in turn has reduced their profit margin. It is working as disincentive for the corporate sector to considerably increase investment. Government obviously cannot rely on increase in private investment in all sectors, and therefore the Union Budget 2023-24 would need to focus on increasing public expenditure.
The past two years has seen the private assets of the private companies growing, while growth of borrowing remains low. However, the problem is that the rate of growth in borrowing is higher than the rate of growth in their assets. In a CMIE report, Mahesh Vyas has mentioned that borrowings were 12.1 per cent higher in September 2021 than a year ago, but these were 11.8 per cent higher in September 2022. And the net fixed assets as of September 2022 were 3.9 per cent higher compared to a year ago, but when adjusted for inflation, it implies shrinking base of the companies.
The rising cost have necessitated the companies to resort to borrowings to support their working capital needs. It is true that several big companies have enjoyed huge profits, but considerable amount of these profits were found to be insufficient in meeting the increased working capital funds requirement of corporate India. As a result, Mahesh Vyas of CMIE says that borrowing went up and consequently, the debt:equity ratio of listed companies has inched up. This ratio (0.63 times) was highest in September in eight years since March 2014 when it was at the same level.
As of September 2022, the interest for listed companies have gone up to 8.6 per cent, from 7.3 per cent in March, and 7.2 per cent in September 2021. Thus, we see that borrowing needs and the interest rates have been on the rise.
In this scenario, corporate India and entire private sector do not seem in a position to expand considerably, and without investment, they are not in a position to support needed growth the face the new challenges.
OECD has said that India would need to develop appropriate financial instruments, test new business models and strengthen institutional capacity.
On demand, output and prices, OECD projections are quite distressing. It says that private consumption would go down to 6.5 per cent in 2023 from 17.7 per cent in 2022. Gross fixed capital formation was 15.8 per cent in 2021, which went down to 6.9 per cent, and is likely to deteriorate in 2023 to 4.6 per cent.
As for the final domestic demand, it rose from 9.4 per cent in 2021 to 13.2 per cent in 2022. However, it is expected to sharply decline to merely 6.1 per cent in 2023.
Export of goods and services that had created a record reaching 24.3 per cent growth in 2021, is likely to decelerate to 10.4 per cent in 2022, and to 5.2 per cent in 2023, OECD economic note for India has stated.
India’s public debt is higher than in peers, and investment is low by Asian standards, says OECD outlook 2022.
Expanding infrastructure spending occupies a central position in the government strategy. These would have some positive results. However, prolonged targeted and non-targeted fiscal measures and rising interest rates are likely to weigh heavy on the public debt.
Though, on current trends, tax collection would surpass the budgeted projection by the end of the fiscal 2022-23, which may reduce the borrowing requirements of the government. However, it would not be sufficient alone. Budget would have to create enough fiscal space to enhance resilience of the Indian economy in 2023, since it cannot escape the global slowdown.
Financing is most likely to be more expensive. High inflation is l set to slow household consumption and delay investments. “Most risks to the projections are tilted to the downside and include a deterioration of banks’ assets quality, despite enhanced provisioning and the establishment of a ‘bad bank’, as well as possible delays in fiscal consolidation,” OECD believes. (IPA Service)