Context

Between spending and saving, governments are generally better at the former. High growth comes with the advantage that government revenue expands and gets spent, as is happening this fiscal. But this is also habit-forming. If growth tapers down as is expected in FY 2024 cutting back government spending will be politically rocky just before a general election. Better then, to get selective on spending early on.

Current economic indicators

Finance Minister Nirmala Sitharaman took over the hot seat in May 2019. True to character, she resolved to pick up this rolling can by tabling in the FY 2021 budget, an amount of INR 2.64 trillion (1.2 percent of GDP) to pay these overdues.
India, yet again, in an era of high inflation and high oil import prices. It has taken courage and sagacity to reduce the FD from 9.2 percent (FY 2021—the COVID-19 year) to a targeted 6.4 percent this fiscal.

The oil slick of global uncertainty and inflation: Oil price uncertainties, created by the Ukraine standoff, which was partially cushioned via nimble Indian diplomacy resisting the boycott of cheaper Russian oil, has kept imported oil at US$77.7 per barrel in January 2023. But the ongoing opening up of China could firm up oil prices.
India’s high-debt burden compromises fiscal resilience: Interest payments in FY 2023 (budgeted) at INR 9.4 trillion, are the largest expense outlay bucket, accounting for 43 percent of budgeted Union net revenue receipts, up from 41.7 percent in FY 2021. Defence and domestic security services at 15 percent come next, followed by subsidies (food, fertilizers, and fuel) at 14 percent and inflation-indexed government pensions at 9 percent.
Infrastructure lags: Infrastructure remains a drag on growth although intercity highways have improved. Multimodal transport solutions remain underdeveloped as do train stations and bus terminals in most towns and rural areas. The competitiveness of major Indian ports in 2018 was ranked 42nd well below China, Malaysia and Thailand- pulled down by low outcomes in infrastructure and turn-around time. The gas grid remains nascent with just 10.1 million connections versus 309 million users for LPG canisters a more volatile substitute for cooking fuel, than piped natural gas.

Inflation: The Reserve Bank of India (RBI) expects retail inflation, assessed at 5.78 percent (December 2022) to trend downwards in FY 2024. But signals of embedded inflation via core inflation (other than volatile food and fuel) above 6 percent are worrying.
Disrupted energy supply: A disruption in energy supplies could upset sanguine inflation expectations.
Taming inflation would increase fiscal crunch: Taming the resulting inflation by reducing taxes on the retail supply of petroleum products would increase the fiscal crunch.
Interests funded by additional borrowings is risky strategy: High-growth economies can afford to fund by borrowings as can start-ups, which borrow against their future growth prospects. For a large, lower middle-income economy like India, with historically moderate long-term growth rates (4 to 6 percent), it compromises reserve fiscal capacity to respond, through counter-cyclical measures, to economic downturns induced by economic shocks a risk-laden strategy.

Resume much delayed disinvestment: Resume the much-delayed privatisation and disinvestment of public sector enterprises and government-owned financial sector entities.
Make Indian railway and autonomous entity: Second, make Indian Railway an autonomously regulated, commercially run entity, providing a surplus to the government rather than looking for budgetary support.
Encourage public finance outlays: Maximise the economic impact by encouraging public finance outlays to be driven by competitive metrics of allocative efficiency across investment options and program/project implementation models.

For a new phase of growth, government disintermediation is appropriate. It allows for increased competition and innovation in the private sector, leading to greater efficiency and economic growth. India has momentum. What it needs is for the reins to be lightly held.

Mains question

Q. What obstacles does the Indian economy face as it enters a new era of growth, and what should India do?