We have seen the economic transformation of countries such as Japan, South Korea, and China, where they grew at rates of 10%+ for three decades. Exports and investments drove these high growth rates.
Such growth rates will require strong fiscal health, a thriving manufacturing sector, liveable cities, skilled human capital, and be driven by private investment. Investment rates will need to rise to around 35% of Gross Domestic Product. In turn, investment is financed by savings. Increasing domestic savings will be crucial in financing these additional investments. Improving fiscal health, along with a focus on formal job creation will increase the pool of domestic savings.
Fiscal stability
In FY24, the combined fiscal deficit (Centre + states), stood at 8.6% of GDP, and the combined Debt to GDP ratio stood at 81.6%. Government deficits will come down in the coming years as the economy continues to grow.
Tax to GDP ratios are improving, touching around 18% in the past year. Capital expenditures have also almost doubled in the past 10 years, reaching 3.5% of GDP. Whilst these parameters have improved significantly since the peak impact of the Covid-19 pandemic, further fiscal consolidation is needed. At the same time, the push towards capex must be sustained in the coming years. Annual net government borrowings have expanded from around ₹9 lakh crore in FY20 to about ₹18 lakh crore in FY24.
Sustained higher borrowings by the government can potentially lead to higher debt servicing costs by raising benchmark bond yields. As these yields serve as a benchmark, this translates into a higher borrowing cost for the rest of the economy. This is essentially what is known as crowding out.
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