Macro stability will be important in a year of less-than-conducive financial markets backdrop of high US interest rates and tight global liquidity, according to Radhika Rao, Senior Economist and Executive Director at DBS Bank Singapore.
"While US inflation is on the retreat, the likelihood that it will stay above the Fed’s target will prevent policymakers from loosening conditions prematurely. Against this backdrop, investors will be more discerning between economies concerning their financial sector dynamics and macro imbalances, with the health of emerging markets likely under close watch," she said.
She pointed out that the government was focused on returning to a path of consolidation through the past two years, with a high likelihood that the FY23 budgeted -6.4 percent of GDP will be met. "In keeping with the FY26 glide path, we expect the FY24 target to be set at -5.9 percent of GDP. Notwithstanding political compulsions, outright measures to directly boost short-term consumption are unlikely, helping to keep additional spending and incremental inflationary impact in check," Rao said.
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A case in point was reorienting food subsidies by withdrawing the pandemic-era free food grain scheme and, instead, making the existing public distribution scheme free, resulting in a smaller hit to the books. Moves might include fine-tuning existing measures, reallocating resources while scaling back Covid-related spending, and more targeted expenditure, besides focusing on medium-term demand boost via higher manufacturing share as well as capex contribution, she said.
"Lastly, fiscal and monetary policies should be complementary by keeping excesses in check this year. The current account deficit, or the gap between savings and investments, will also narrow from fiscal consolidation and a public sector boost to capex lifting investment growth. Concurrently, a more competitive currency makes imports dearer, raising the demand for domestic inputs and supports exports on effective exchange rate terms, aiding external balances," Rao said.
DBS Bank expects a three-pronged focus in the Budget. The rural economy and social welfare push will be a key thrust area. Most key GDP components have returned to pre-pandemic levels, including private consumption, even if the pre-pandemic potential growth trend lags. As idiosyncratic tailwinds dissipate, authorities will be keen to support consumption. Rural farm real wage growth stagnated in 2022 due to high inflation, an increase in input prices, and volatility in weather conditions (farming community).
The recent easing in rural inflation and a solid start to rabi sowing will help the near-term momentum. Besides, the non-farm rural sector is benefiting from backward linkages to a pick-up in urban business activity, and policy support is also likely, said Rao.
"One potential area is increasing allocations towards the rural employment scheme, MNREGA against FY23’s Rs 730 billion (0.3 percent of GDP). Besides this, other focus areas include further impetus to allied schemes such as crop insurance, rural road infrastructure, low-cost housing, power and utilities, food-processing industry, etc. Backstopping urban employment focus by channelling resources towards skill/ vocational training and upgradation."
Higher investments in health and education are likely to remain one of the key demands, according to her. "There have been calls for raising the income tax exemption limit, but this demand might revive the debate over the lack of a wider tax base to make up for missed revenues. Core and core of core schemes are likely to be in focus as the economy recovers from the pandemic, with a preference for reallocation of resources rather than an across-the-board increase in spending," she said.
There could be a broadening of the support for manufacturing and supply chain rejig. Fiscal incentives, like the production linked incentive scheme, have benefitted many sectors, especially electronics, including the production of mobiles. Self-sufficiency in chip production is the other area of focus, where many economies such as the US, Europe, and Japan also seek to localise production facilities, she feels.
"Authorities plan to extend this incentive to green hydrogen manufacturing. Other demands have included extending the capital support for the electronics sector (under SPECS) and higher outlay. Understandably, these announcements are not limited by the Budget timing and will be fine-tuned along the way."
"The need to spur a revival in the investment cycle still rests on the public sector, even as a slowdown in global growth and tighter financial conditions emerge as speedbumps for private sector activity. The focus will also be on public sector capex contribution, including state governments and central public sector enterprises."
"Notably, the move towards higher transparency in the Budget math by onboarding off-budget spending has translated into an increase in the share of centre’s capex, whilst moderating that of the CPSEs, leaving overall public sector growth largely steady," Rao said.
"For the RBI monetary policy committee, the inflation trajectory is more conducive than before. CPI inflation undershot the official projection for Q3 FY by 40bp, which is likely to be the case in Q4 FY. Unseasonal October rains did not disrupt the softening food path. Besides, WPI inflation is also on the retreat just as commodity prices correct, and the rupee catches up with regional peers on dollar weakness, keeping tradable price pressures in check."
"Yet inflation is still in the upper half of the RBI target band, and core prints are hovering above the headline, deterring the MPC from shifting to a neutral gear in a hurry. With the US Fed in the late lag of its hiking cycle, we expect the MPC to deliver a final 25bp hike in February before settling into a prolonged pause," Rao further said.
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