Fiscal consolidation will dominate the narrative in the upcoming Budget despite economic and political compulsions, said Radhika Rao, Executive Director and Senior Economist at DBS Bank. In an interview with MintGenie, Rao said that she pegs the FY24 deficit at 5.9 percent of GDP. She expects the FY24 Budget to focus on four priorities - rural economy, capex, manufacturing and macro stability.
The advance GDP estimate for FY23 is 7 percent. Amid the current environment, is this satisfactory, in your view?
The advance estimates are in line with our forecast. India stayed on track with its reopening in 2022, benefiting from significant vaccination coverage and low fatality rates from the subsequent Covid sub-variants. This allowed for the economy to emerge amongst the regional outperformers on growth and financial markets action.
What are your expectations from the upcoming Budget?
Revenue overshot should help meet the budgeted deficit target amounting to 6.4 percent of GDP. We peg the FY24 deficit at 5.9 percent of GDP.
What themes would the Budget focus on this year?
Besides a routine interest in the annual presentation, the FY24 Budget comes ahead of a busy state poll calendar in 2023 followed by general elections in 2024. Fiscal consolidation will dominate the narrative despite economic and political compulsions. We expect the FY24 Budget to focus on four priorities, including a rural focus, capex, and manufacturing push as well as prioritising macro stability.
What are the headwinds that lie ahead for the manufacturing space? What changes/steps in this Budget can help the sector boom?
We expect the manufacturing push and supply chain reorientation to be a priority in the year ahead. Fiscal incentives, like the production linked (incentive) scheme, have been beneficial for many sectors, especially electronics including mobile production. 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. Concurrently, investments in traditional sectors including textiles, auto components, metals, and mining, etc. are also gaining traction. Other efforts could also focus on improving the ease of doing business by administrative (e.g., National Single Window System) and supply side measures, for instance ironing out inverted duty structures, clarifying import duty policy, and FTA pipeline, amongst others.
What are your expectations for the farm and the services sectors from this Budget?
Most key GDP components have returned to pre-pandemic levels, including private consumption, even if lagging the pre-pandemic potential growth trend. As idiosyncratic tailwinds dissipate, authorities will be keen to support consumption. The rural economy is likely to be one of the focus areas, especially after real wage growth stagnated in 2022 due to high inflation, increase in input prices and volatility in weather conditions (farming community). A recent easing in rural inflation and a strong start to rabi sowing will help the near-term momentum, besides the non-farm rural sector benefiting from backward linkages to a pick-up in urban business activity, policy support is also likely. One potential area is increasing allocations towards the rural employment scheme, MNREGA vs FY23’s INR 730bn (0.3% of GDP). Besides this, further impetus to allied schemes such as crop insurance, rural road infrastructure, low-cost housing, power and utilities, food-processing industry, etc. are other focus areas.
Do you see inflation back in the RBI range soon?
After three successive quarters of running in excess of the RBI target, inflation has fallen back into the 2-6 percent target range, even as core readings remain stubbornly sticky. We expect favourable base effects to ease the headline in FY24, but average on the upper end of the target range, subject to volatile food price pressures and assuming global commodity prices stay benign.
With the inflation moderating, do you think there is a change of the rate hike cycle stopping this year?
While the MPC was non-committal on the path ahead, we expect the direction to be data-dependent. With inflation off the boil and high-frequency data likely to increasingly turn mixed, we expect the remaining 25bp hike to be delivered at the February meeting before rates settled into a prolonged pause.