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The Economic Survey has evolved into a valuable document and, in recent years, has often presaged the contours and strategy of the Union budget. Even in its truncated form this year, the Survey provides insights into the economic conditions and outlook which are key inputs for the FY23 budget assumptions.
The Survey notes that India’s growth–inflation trade-off is becoming more favourable. Economic recovery has stabilised and is proceeding apace, while prices are expected to moderate in the months ahead. It projects that GDP growth in FY23 will be 8.0-8.5 per cent, moderate and more realistic compared to the IMF’s recent forecast of 9.0 per cent for India. This follows the official estimate in early January of a 9.2 per cent growth for FY22, which the Survey has retained.
However, there are risks that will need to be addressed.
India’s external environment is likely to be less benign than in FY22, and financial markets are likely to remain volatile. As the world comes out of the pandemic and the set of extraordinary policy stimulus measures, the Central banks of many countries, grappling with high, persistent inflation, have reversed their accommodative monetary policy stance. The US Federal Reserve is expected to aggressively tighten its monetary policy, starting with hiking its policy rates at its March 2022 meeting and, thereafter, start extracting the huge infusion of liquidity during the pandemic period.
In its recent update of the World Economic Outlook, the IMF projects that the world GDP growth will decelerate from 5.9 per cent in 2021 to 4.4 per cent in 2022. China’s slowing economy is expected to contribute to this, but the large developed markets are also decelerating. India remains the only bright spot, with growth expected to continue at 9.0 per cent (or even the Survey’s 8.0-8.5 per cent range). The WTO forecasts global trade volumes to moderate, falling from 10.8 per cent in 2021 to 4.7 per cent in 2022. This is going to be mostly led by a drop in emerging markets. Note, too, that the high demand for consumer goods during the pandemic is likely to cycle back towards travel and hospitality services, meeting pent-up demand.
Even more importantly, India’s nominal growth in FY22 is 17.6 per cent, which implies an increase of roughly Rs 30 lakh crore over the FY20 pre-pandemic level. In terms of the segment of economic activity which is expected to contribute to this increase in nominal incomes in FY22, both consumption and fixed investment are expected to add about Rs 10 lakh crore each and government spending about another Rs 6 lakh crore. How this additional income is likely to be distributed, especially for lower-income households, will have implications for durable recovery and aggregate demand going forward. The FY23 budget is likely to project a nominal growth rate of 13–14 per cent on which the fiscal assumptions will be based, assuming an 8.3 per cent real GDP growth and 4.5 per cent inflation rate.
On inflation, prospects seem a little better in FY23, with our base scenario of a gradual fall from the current high levels of about 6 per cent in Q4 of FY22, to an average of 4.8 per cent in FY23. However, there are risks. Crude oil prices — indeed, the entire energy complex of gas and other hydrocarbons — remain a source of concern. Brent crude is likely to remain elevated so long as current global geopolitical tensions continue, but are unlikely to lower significantly due to a continuing demand–supply imbalance (the International Energy Agency had recently forecast that demand in 2022 is likely to be higher than the pre-Covid levels, particularly if travel demand resumes), coupled with very moderate investments in new sources of hydrocarbons. China’s growth slowdown had cooled the prices of some key metals, but more stimulus measures are already underway, and some growth recovery might again take these prices up. In addition, the broader move towards electrification and decarbonisation will keep the prices of another set of metals high. Shortages of chip and electronic components are likely to continue for some time. The good news is that logistics and the operational costs of cross-border trade have come down.
In light of these expectations, the importance of the Union Budget, and more broadly the fiscal space, is evident in the sequencing of the Survey chapters, with the fiscal developments following the lead chapter on growth and aggregate demand. The role of monetary policy will largely be in keeping financial conditions stable, even as the RBI begins a gradual, calibrated normalisation. While the Centre’s balance sheet remains strong, growth in tax and other receipts might be expected to moderate in FY23, given the economic conditions noted above, and a possible need to further cut excise taxes on fuels. Be that as it may, the Centre has headroom to maintain relatively high expenditure without having to take recourse to a large bond borrowing programme, which might take interest rates much higher. The very large estimated cash balances with the RBI at present are likely to be augmented by direct tax and GST collections in March, and will help to finance the fiscal deficit in FY23. Proceeds from the LIC IPO will either add to these balances in FY22 and or become an additional revenue source in FY23, opening up the fiscal space to provide additional support to economically vulnerable segments, which is likely to be required.
On reinforcing India’s medium-term “potential growth” prospects and the associated “output gap”, the Survey notes longer-term uncertainty in the post-Covid world due to technology, supply chains, geo-politics and other shifts. The ability to sustain a 7-8 per cent growth over many years without the economy overheating and the consequent need for policy tightening will determine income potential and distribution over the next decade. The Economic Survey notes that MSMEs account for 33 per cent of India’s nominal Gross Value Added (GVA), and will be a key pillar for supporting growth and employment. This segment will be a key beneficiary of the Union budget’s pivot towards capital spends during the last couple of years, a statement of the government’s commitment to a growth revival plan, which is expected to continue even in FY23. Backing this is a programmatic approach to creating infrastructure through a pipeline of projects, supported with a financing outlay, including the planned asset monetisation. The “Twin Balance Sheet problem” of impaired corporates and banks had hindered capex programmes for many years but has now been significantly resolved. Conditions are favourable for the next capex cycle and will need multiple interventions, supported by industrial, trade and skilling policies to further ease business operating conditions. The Survey “particularly highlights the importance of process reforms” to raise India’s competitiveness and growth trajectory.
The writer is executive vice president and chief economist, Axis Bank. Views are personal
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