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The government has a clear mandate for the next term. It should focus on boosting private consumption, employment, exports, private investment and developing a roadmap for debt reduction.
The election result was an unexpected turn, running counter to exit poll predictions and market expectations. However, the agenda for the next government remains firm.
Among other things, it must focus on accelerating growth, addressing rural stress, creating jobs in manufacturing and services, boosting consumption and private investment, and addressing sector-specific challenges to increase exports.
The new government inherited a booming economy. Gross domestic product (GDP) figures released before the election results continued to surprise on the upside, beating previous estimates and market expectations.
Of course, GDP was boosted by strong net tax growth (thanks to higher taxes and lower subsidies). Even using the cleaner gross value added (GVA) metric, India posted a decent growth of 7.2% in 2023-24.
In recent years, economic growth has been fueled by aggressive government promotion of capital spending, credit growth driven by the financial health of the banking sector, and robust service exports supported by the growth of global centers of competence. But maintaining this high growth rate requires addressing some long-standing pain points in the economy.
Stimulate private consumption growth
Although GDP recorded a strong 8.2% growth in 2023-24, this growth was not across the board. Private consumption, the mainstay of the economy, grew by only 4%.
Demand for fast-moving consumer goods remained weak, possibly due to high inflation and lower wage growth. Rural demand was also weak due to poor rainfall last year and poor performance of the agricultural sector.
There are tentative signs of recovery in rural demand, reflected in growth in FMCG sales, but these signs need to be sustained. Spatial distribution of rainfall and continued signs of declining food inflation will be critical for demand to rebound.
What measures can the government take to boost consumption? Typically, weak demand is addressed through expansionary fiscal and monetary policies. If the government chooses to go the path of fiscal consolidation while increasing capital spending, larger tax cuts may be difficult.
The government is still some distance away from achieving the medium-term fiscal deficit target of 4.5% by 2025-26. However, a revision in the GST rates could be considered as it would help in tax rationalisation and reduce the tax burden.
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