Economic Survey strikes right balance between realism & aspiration. Will Budget do the same?

2023 has commenced with the global economy confronting several forks in the road. Three paths still appear possible, though some are more likely than others. First, that global growth and labour markets remain more resilient than expected such that inflation does not come-off enough to meet central banks targets. This will necessitate global monetary conditions remaining “high for very long” risking a subsequent hard landing. The implication: global growth holds up but very tight monetary conditions in advanced economies pose macro-stability risks for emerging markets.

Second, that the U.S. economy – whose momentum is rapidly slowing — slips into recession and weighs on global growth. Inflation comes off and central banks quickly pivot, but soft global growth weighs on emerging markets. Third, growth slows enough to engineer a disinflation but not enough to result in a disruptive recession. A modest increase in unemployment in advanced economies is enough to soften wages and prices – the Goldilocks “soft landing” that global markets are fervently hoping for and increasingly pricing in.

What this range of outcomes starkly reveals is the unprecedented uncertainty under which policy will have to be conducted in emerging markets this year. It may not be clear for some time whether the predominant policy focus will have to be on protecting macroeconomic stability or fostering growth. It’s against this backdrop that India’s budget will have to deliver an artful balancing act between growth and stability. The reassuring news: simply following the template of the last two years will be a very good starting point.

What has been that template? A realistic quantum of fiscal consolidation, conservative tax assumptions, and a strategic thrust on public investment as a near-term driver of growth. The same prescription is what the economy needs at this moment. With total public sector borrowing still upwards of 9% of GDP, dogged fiscal consolidation is the need of the hour to preserve macroeconomic stability, rein in imbalances and avoid crowding out.
That said, given the two-sided uncertainties, about a 0.5% of GDP reduction in the deficit would come across as pragmatic and credible. Importantly, the savings from tapering the free grain programme and lower global fertilizer prices has meant that subsidy savings next fiscal could be as high as 0.6% of GDP – thereby delivering the entire consolidation needed. This will take the pressure of both the revenues side and non-subsidy expenditures.

With growth pegged to slow, tax buoyancy (which is an impressive 1.2 this year) can be conservatively budgeted at 1. On the expenditure side, non-subsidy expenditure can be maintained as a share of GDP and space may even exist for the Centre to further increase capex/GDP – key to job creation, crowding in private investment and boosting potential growth.

In turn, the budget has been prefaced by a comprehensive, credible and thoughtful Economic Survey. The survey correctly notes that private capex is the key to sustained job creation and that the clean-up in corporate and bank balance sheets witnessed in recent years is bringing forward the prospect of a muchawaited capex cycle.Equally, however, the survey rightly underscores the panoply of global risks that the economy must contend with, from slowing global growth to still-elevated commodity prices to “higher for longer” monetary policy and why, through these crosscurrents, the current account balance must be carefully watched.

Apart from analyzing the near term, however, economic surveys must have an aspirational streak to them and chart out the future course. Here the Survey makes an important contribution by identifying the next tranche of reforms from education, skilling and managing the energy transition to reforming power distribution and dismantling the licensing, inspection and compliance regime entirely – a topic that the author has passionately advocated over the years.

The Survey strikes the right balance between realism and aspiration. The expectation is the budget will do the same: providing a steady hand on the wheel to navigate near-term uncertainties, while sowing the seeds for stronger medium-term growth.