This article focuses specifically on the Budget and what signals it could send. First, I suggest some standard macroeconomic tests which the budget must pass. I then turn to some areas where a new approach is needed and which are more controversial.

Basic macroeconomics

Viksit Bharat, understood as reaching developed country status, requires 8%-plus growth on average for the next 23 years! The economy did record an average of 8% growth in the last three years, but that was the recovery from the pandemic. The average over the last six years is only 4.9%. This can and should be improved, but most international agencies project that India will grow at 6.5% over the next few years.

The Budget is not the place to present long-term growth targets, but some indication of the growth on which it is based is needed. As Martin Wolf of Financial Times recently pointed out, even if we don't achieve 8%-plus, but grow between 6.5% and 7%, we could still end up as one of the superpowers because other countries are expected to grow much more slowly.

The Budget would do well to state a clear target of, say, 7% real growth on average for the next three years. Actual performance can then be measured against this target and policy corrections made as needed.

Fiscal deficit is the key target on the basis of which analysts judge macroeconomic stability, which in turn can affect investor perceptions. India's fiscal deficit (Centre plus states combined) has been much higher than in most other developing countries. This means the Centre and state governments together take up a large part of the available savings in the economy, crowding out private sector investors who might otherwise use the savings to finance investments.

Efforts were being made to reduce the deficit, but these were derailed by the pandemic. Since other countries had the same experience, we did not suffer reputational damage. In the first budget after the pandemic, the finance minister had announced that the Centre's fiscal deficit would be reduced to 4.5% of gross domestic product (GDP) by 2025-26. Recommitting to this target would send a good signal.

It will be easy to retain the 5.1 % fiscal deficit mentioned in the interim budget thanks to the large Reserve Bank of India transfer. Reducing it to 4.5% next year is credible. The finance minister could go further and target 4% in 2026-27. It was the practice earlier to project the deficit for two years beyond the current year and this should be restored.

Fiscal targets are impressive only if they are credible. This depends on whether they are consistent with meeting the many expenditure demands that will arise within the revenue growth expected. Strong GDP growth will help generate higher revenues. This can be further boosted by tax reforms.

The most urgent tax reform needed relates to the goods and services tax (GST), and what needs to be done is also well known. Purists argue there should be a single rate. Others argue for no more than two rates, with an additional "sin tax" for certain items.

A basic problem in the present GST is that half the items in the average consumption basket are exempted from GST. This was done in the interest of progressivity, but the largest part of the consumption of these items is by the non-poor. An IMF Board review on the value-added tax experience in developing countries stated that if GST were extended to all these items, the effect on the poor could be completely offset by a direct benefit transfer of ₹2,000 per month to each poor individual, and it would cost only one-fifth of the revenue gain!

Technically, GST rates can be changed only by the GST Council, but the finance minister could use the Budget to indicate the specific changes she intends to propose to the council. This would be a basis for discussing in Parliament and starting the political outreach that will be needed to build public support. Some states may not agree, but a GST Council decision does not have to be unanimous; it needs only a weighted majority. Relying on the majority would be legitimized if there is broader discussion.

The credibility of the fiscal deficit target would be enhanced if the government reiterated the earlier commitment to privatize non-strategic public sector units (PSUs). This commitment seems to have evaporated. Air India is a distinguished exception, but much more could be done, garnering additional resources. The budget will be carefully watched to see what signals it gives on privatization remains on the agenda.

Infrastructure development is widely regarded as a success story, and one can assume that the budget will signal that this thrust will continue. However, much more could be done through public-private partnerships (PPP). For example, there is no reason why the proposed modernization of railway stations should not be opened to PPP.

Areas of weakness needing corrective steps

A major weakness in the growth story thus far is that private investment continues to be depressed, despite tax changes that were meant to stimulate it. Some will be tempted to conclude that perhaps we should turn to greater reliance on the public sector. The government would do well to clarify that while the public sector certainly has a continuing and important role to play, the lead role in achieving high growth and generating employment has to be played by the private sector.

In this context, a reduction in the fiscal deficit would help to revive private sector investment. The net financial savings of the household sector had fallen to about 5.2% of GDP in 2022-23 when the combined fiscal deficit was 8.8% of GDP. This clearly left nothing for the corporate sector. Reducing the deficit will effectively push the financial sector to increase the flow of finance available for the private sector, including those in the small and medium sector.

Employment generation is another weak spot. While experts differ depending upon the data source they use, there is no doubt that the economy is not generating good-quality jobs of the kind that the increasingly educated new entrants into the labour force want. This is starkly borne out by the lack of job offers for graduates from our top institutions, and news of layoffs in many areas.

To generate more good quality employment, we need higher growth and more labour-using growth. East Asian countries succeeded by adopting a strategy based on a rapid expansion of exports of labour-intensive manufacturing. The government has targeted high export growth in the hope that this will stimulate both employment and domestic manufacturing, but we have not been successful. Both exports and manufacturing have stagnated in recent years. We cannot blame global trends since countries like Bangladesh and Vietnam are doing much better. The fault lies in our industrial and trade policies, and the sooner we realize this, the better.

Much of the action needed is in areas which are outside the budget. In my view, we need to (a) reduce our customs duties, which are much higher than in other developing countries and have actually increased since 2017; (b) sign free-trade agreements with major economies that would give us access to their markets, and for this we may have to accept alignment of standards on many non-tariff issues; (c) introduce greater flexibility in labour laws that will make manufacturing more competitive; (d) manage the currency in a way that avoids an appreciation in the real exchange rate, and finally (e) undertake a major effort at skill development to produce a more skilled labour force in the short run.

Only the first of these problems, i.e. high customs duties, can be dealt with in the budget. The others require a more comprehensive approach, but the budget could signal how the government intends to address this issue.

This raises a potentially controversial issue in the march to Viksit Bharat. Should India become more open at a time when other developed countries are turning inwards? A good case can be made for doing so because we are at present much more closed than others. The government has rightly stated that it wants to integrate with global value chains. The current disenchantment with China, and the desire to have a China plus one strategy, provides an opportunity for India. But this will require lowering of tariffs and other trade barriers. Since space constraints make it difficult to elaborate this point, I propose to do so in a separate article in this paper.

Finally, a word on India's statistical system. It was at one stage a model for developing countries but is no longer so. As we move to become the third-largest economy in the world, wanting to attract more foreign direct investment to support our development effort, and also striving towards internationalizing the currency, we have to be ready for much greater scrutiny of our economic statistics. This is not a budget-related issue, but the budget speech provides an opportunity for announcing that the government intends to undertake a major modernization of the national statistical system and will consult the United Nations, the International Monetary Fund and the World Bank for inputs to ensure that the reform is in line with global standards of quality and transparency.