 "Sajjid Z Chinoy, chief India economist, JP Morgan; Pranjul Bhandari, chief India economist, HSBC; Samiran Chakraborty, managing director & chief economist India, Citigroup; and Indranil Pan, chief economist, YES Bank")
(From left) Sajjid Z Chinoy, chief India economist, JP Morgan; Pranjul Bhandari, chief India economist, HSBC; Samiran Chakraborty, managing director & chief economist India, Citigroup; and Indranil Pan, chief economist, YES Bank Photo: KAMLESH PEDN
India needs to focus on attracting mid-tech foreign direct investment (FDI) for job creation as all large economies are focusing on hi-tech FDI, and they have enough resources to allow them to provide subsidies, leading economists concurred on Wednesday in a panel discussion at the Business Standard post-Budget summit in Mumbai.
The panel consisted of JP Morgan Chief India Economist Sajjid Z Chinoy, Citigroup India Chief Economist Samiran Chakraborty, HSBC Chief India Economist Pranjul Bhandari, and YES Bank Chief Economist Indranil Pan.
In response to a question on whether the government has taken an appropriate approach in prioritising job creation as a major macroeconomic objective, Bhandari said in order to take advantage of the alignment of the global value chains, India needed to move towards to mid-tech FDI over the medium term in sectors such as textiles, toys, handbags, and small electrical equipment.
“Twenty-five to 30 per cent of global capital last year went to the United States (US) in hi-tech, which the US has been subsiding for the past few years. In order to focus on mid-tech, we need policy certainty and low and stable import tariffs, and announce publicly we will keep our import tariffs stable over the medium term,” she added.
She added India needed to sign “deep” free-trade agreements (FTAs), particularly with large countries and trading blocs, and simplify norms under programmes such as the production-linked incentive (PLI) scheme.
Besides, she concurred with the assessment that the private sector needed to create jobs as stressed by the Union Budget.
“The job-creation challenge is so large that all have to do their bit. Eighty per cent of investment is done by the private sector. In a way, they are the ones who need to create jobs and I am not surprised the role of the private sector was discussed in this Budget as well,” she added.
Gradual consolidation of fiscal deficit
India needs to bring down its fiscal deficit to achieve medium-term debt sustainability. However, the reduction should not be rapid because the private sector is taking time to recover and the public sector cannot retrench too quickly.
In response to a question on how well the Budget addressed India’s fiscal challenge, Chinoy said the government’s decision to consolidate fiscal policy was an important move to achieve India’s medium-term goal of fiscal sustainability.
“… Private sector demand is still a work in progress and consumption [is softening] in recent years … it is equally important for the deficit not to consolidate too quickly. I think the Budget has done the right thing over the last two years, given that our starting points were so elevated. [Hence] we have achieved the first goal. But I still think we have got this tradeoff in front of us. We should not bring them down too rapidly,” he added.
Besides, speaking of the possibility of a range for the fiscal deficit, akin to inflation targeting, Chinoy said having come to these fiscal-deficit levels, the question was how the debt situation evolved, and that, in turn, was going to be a function of three variables — the primary deficit, which the government controls, interest rates, and nominal gross domestic product (GDP) growth.
“If nominal GDP growth is even higher, we can live with higher deficits and debt will be stable. If nominal GDP is lower, then inter-temporal debt sustainability is going to involve more fiscal consolidation. In other words, this is a dynamic process. I think a range is something that we’re going to have to get used to,” he added.
However, Chinoy said having a deficit range involved a tradeoff because it might lead to too much uncertainty every year regarding the next year’s fiscal-deficit target.
Infrastructure diversification
Assessing the Budget from the investment side, Chakraborty said the first five years of this government were more about formalising the economy and the next five years were about infrastructure.
“This Budget is about laying down what the next five years will be about. One of the focus areas will be about getting human capital upfront. The government’s thinking could be that we have already done something on physical capital, and now it’s time to do more on human capital. However, this does not mean that the government will stop working on physical capital and formalisation. Those processes are at play and the government has to add on to it,” he added.
The Budget gave the signal the government was not going to focus just on large-scale manufacturing, he added.
“It focused a lot more on micro, small, and medium enterprises (MSMEs) to get the balance right. This will also help with the human capital story because MSMEs are the high-employment creators. Central capex used to be too focused on roads, railways and defence, [which] this Budget is diversifying into multiple sectors. The central government was also forced to allocate larger and larger sums to state governments to spend on tariffs. So now there is an alternative avenue to spend this capex on multiple other sectors,” he added.
Impetus to demand
Recognising the demand push in the Budget, Pan said policymakers were facing the challenge of pushing the economy from a per capita income perspective.
“Ultimately the sustainability of the fiscal and debt structure of the economy will also depend on per capita income. Now, after all these years of development we still have a very minuscule proportion of people who pay income tax. Yes, consumption tax is more across the board, but I think if the direct tax net has to be widened, the income levels of the people need to grow, and that’s what the Budget tried to achieve,” he added.
The demand push need not have come directly from the Budget but the building blocks for establishing higher demand in the economy are present in it, he said.
“If you have a better employment scenario, incomes grow automatically. The productivity of agriculture is going to increase so that clearly establishes a situation where the government is trying to create an atmosphere of price stability, and therefore a demand push in the system,” he said.
The Budget indicates MSMEs haven’t been spending adequately on capital. All that put together is going to provide an upswing in terms of income generation on a personal level, and that in itself will lead to demand growth and sustainability.
First Published: Jul 31 2024 | 11:55 PM IS