February, a policy-heavy month, began with the announcement of the Union Budget for fiscal 2024 followed by the monetary policy review.

Both these critical events were framed against the challenging backdrop of a looming global slowdown and continuing geopolitical uncertainty.

The budget chose fiscal rectitude over pre-election largesse. And that too, transparently and with realistic underlying assumptions. The assumptions on growth and tax buoyancy are doable in our assessment.

Within these constraints, the budget accelerated the momentum on public capital expenditure (capex) allocation by cutting revenue expenditure. Government capex, no matter which way you look at it —investments via budgetary spending, loans and grants, or through public sector companies — has risen almost a third. And capex is in infrastructure sectors such as roads and railways, which have high positive spill-over effects on the economy.

Interestingly, the budget for fiscal 2023 also followed a similar strategy but the assumptions went awry with the onset of Russia-Ukraine conflict. Despite huge deviations from the budget estimates in both expenditure and revenue, fiscal deficit for fiscal 2023, at 6.4% of gross domestic product (GDP), was on target due to the upside in tax collections from a higher-than-expected nominal growth.

The situation this year is equally uncertain with several moving parts. The fiscal authorities will need to keep their options open, in the event the global economy throws a few curveballs.

The fiscal rectitude was not enough to change the direction of monetary policy. The Reserve Bank of India (RBI) delivered a 25-basis point rate hike to break persistence of core inflation and anchor inflation expectations. The inflation print of 6.5% for January, which came within a week of RBI’s policy announcement, vindicated its caution on inflation.

While, in our base case, we expect repo rate at 6.5% to be a terminal one in the current monetary tightening cycle, another rate hike cannot be completely ruled out given the uncertainties around inflation.

Looking beyond the recent growth dynamics, this month’s theme dwells on the medium-term growth drivers for India. Growth accounting, a nifty way to decompose GDP growth into contribution of capital, labour and efficiency, is a useful tool to do this.

Our assessment suggests that capital will be a key contributor to growth over the medium run as the government has accelerated its investments and the private sector is primed for undertaking investments.

Productivity's contribution to growth, too, is likely to increase given the efficiency gains from reforms and swift digitalization are yet to fully yield benefits.

Labour’s contribution to growth is likely to be the least not because India does not have sufficient people in the working age group (15-64 years). On the contrary, this cohort is 67% of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding back its potential.