Dear Reader,
This year’s Union Budget is being prepared against a backdrop of extraordinary uncertainty. The IMF’s World Economic Outlook Update talks of a disrupted recovery. It says, “Supply chain disruptions, energy price volatility, and localised wage pressures mean uncertainty around inflation and policy paths is high.”
Earlier, the World Bank’s Global Economic Prospects, its flagship publication, said, “The global recovery is set to decelerate markedly amid continued COVID-19 flare-ups, diminished policy support, and lingering supply bottlenecks.”
The priorities last year were clear — spend as much as possible to offset the impact of the pandemic. Pent-up demand aided the recovery and the rebound in the corporate sector helped strong growth in tax revenues. This year, things are very different.
Inflation has forced central banks across the world to start tightening monetary policy and drain the sea of liquidity that supported asset values. That has led to funds flowing out of emerging markets, tightening financial conditions. Bond yields have already shot up. Supply disruptions persist, fanning inflationary fires.
We were more circumspect about the prospects of CSB Bank and said investors would be better off waiting before venturing into Yes Bank, while Bandhan Bank and JSW Steel are best avoided in a risk-off market. For the Adani Wilmar IPO, long-term investors could wait on the sidelines.
While growth has picked up, our Economic Recovery Tracker finds several high frequency indicators are still short of the peaks reached months ago. It’s also far from certain how sustainable growth will be. Crude oil prices are already around $90 a barrel. Our current account deficit is likely to shoot up. Pent-up demand will shift from goods to services as restaurants and hotels and travel recover. But that too is contingent on whether we have seen the last of COVID-19 — our Herd Immunity Tracker says we are probably past the worst, unless a more virulent variant is around the corner. And what if pent-up demand fades at a time when monetary and fiscal stimulus is being withdrawn? These are the issues the Budget will have to grapple with.
Analysts are also divided about the Chinese economy, upon which the prices of many commodities depend. For the Indian steel sector too, much depends on what happens in China. Its zero-COVID policy is already affecting its economic growth, which has forced the People’s Bank of China to ease monetary policy.
We continued with a series of data-based stories on the Budget, including on the realty sector, the quality of government expenditure, capex, and what Budget day market moves tell us about short-term trends in the market. Note also that much of the Budget is earmarked for items of expenditure that can’t be avoided, leaving only about half left over for development and welfare schemes.
But perhaps the government has already shown us the best way to navigate the uncertainties, when it opted for bold reforms during the pandemic. What is needed most during trying times is confidence, and the finance minister can help that by being realistic about Budget targets, being as transparent as possible, refrain from populism, implement the asset monetisation and privatisation promised in last year’s Budget and be conservative about government finances.
It’s a tall task, of course, and its enormity prompted me to offer this zany solution, tongue firmly in cheek.
Checkout Budget Highlights 2023
