Sustained recession in West, new Covid wave casts a shadow on Budget 2023

Ahead of the Union Budget for 2023-24, Budget makers have welcomed the global consensus view that India will remain one of the bright spots in calendar year 2023. But there is some alarm over the grim global situation and how that might impact the Centre’s projections and assessments for next financial year.

The big global headwinds include a deep and sustained recession in the West, including India’s biggest trading partners in North America and Europe, continuing volatility in commodity markets, and renewed Covid-19 fears, as lifting of strict curbs by China could potentially lead to a massive spread again.

As reported earlier, the Economic Survey 2022-23 could project FY24 real gross domestic product (GDP) growth at 6-6.5 per cent, while the Budget for 2023-24 itself could project a nominal GDP growth rate between 11 and 12 per cent.

Policymakers are now examining the extent to which global factors might impact the fiscal and economic situation at home, and whether the estimates in the coming Budget should be conservative or optimistic.

“The recession in the West will reduce our growth rate and that will have a second-order impact on tax collections,” said a top government official who did not wish to be named.

According to the International Monetary Fund’s (IMF) latest World Economic Outlook, a third of the global economy is expected to slip into recession in calendar year 2023. In its October report, the IMF cut its forecast for global economic growth in calendar year 2023 by 20 basis points to 2.7 percent, with a 25 per cent probability that it might fall below 2 per cent. “More than a third of the global economy will contract this year or next, while the three largest economies — the United States, the European Union, and China — will continue to stall. In short, the worst is yet to come,” said IMF Economic Counsellor Pierre-Olivier Gourinchas.

Earlier this month, the World Bank said while India was relatively resilient when compared with other major economies, it would still not be completely insulated from the spillovers from the US, euro area and China. For FY24, the World Bank cut India’s GDP growth forecast to 6.6 per cent from 7 percent earlier.

“The Indian economy will be impacted by the slowdown in the West. Both our exports and imports will be hit, and that in turn might impact excise and goods and service tax (GST) collections. On the GST front, there is also the matter of base effect,” a second government official said. “The expected slowdown in the trade economy might also have a trickle-down impact on manufacturing and services sectors, and that could impact job creation. These are the factors we cannot ignore.”

With no end to the Russia-Ukraine war in sight, commodity prices and food supply chains are expected to be volatile. “We expect global inflation to peak in late 2022 but remain elevated for longer than previously expected, decreasing to 4.1 per cent by 2024,” said the IMF in October. For calendar years 2022 and 2023, the IMF’s global inflation projections stand at 8.8 per cent and 6.5 per cent, respectively.

For India, the RBI has projected inflation at 5.2 per cent in FY24.

Add to these the latest developments in China. News agency Reuters reported on Tuesday that China’s abrupt end to its zero-Covid policy raised concerns of widespread infections among a vulnerable and under-vaccinated population with little natural immunity. That could overload the health system and result in up to 2 million deaths or more.

“The latest news out of China is concerning. It is an evolving situation. We will have to keep up our guard in terms of travel restrictions, as well as gauge the economic impact,” said the first official quoted earlier.

Concerns for India

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  Recession in the West could impact India’s growth and jobs
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  Trade economy may weaken, affecting tax collections
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  Global inflation situation still uncertain
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  New Covid wave in China an alarm for global public health and economy