On eve of budget review, macro worries are back amid global recession fears

EVEN AS interdepartmental consultations for revised estimates of Union finances for 2022-23 begin on Monday, October 10, internal discussions within the Prime Minister’s Office and the Ministry of Finance seem to suggest that the cascading impact of a Worse-Than-Expected Global Slowdown Could Drive Fiscal Arithmetic in the Second Half of the Current Fiscal Year.

So far, political leaders have been somewhat optimistic with the benefits – a slight increase in GDP growth in April-June; stable tax revenue, including monthly Goods and Services Tax (GST) collections averaging about Rs 1.48 lakh crore; and more leeway for the Indian rupee to depreciate based on the REER (real effective exchange rate) vis-à-vis other countries.

But policymakers are now pointing to multiple headwinds: pressure on the twin deficits (fiscal deficit and current account deficit), worries about private investment and job creation, and continued distress in the MSME (micro, small and medium enterprises). All of this, combined with a hike in policy rates by the RBI – 190 basis points since March – should dampen the nascent consumer-led domestic recovery, even as fears of a global recession loom.

While tax revenue has shown robust growth, the revenue trend is expected to improve in October-March as non-tax revenue is not expected to be substantial. “(In a slowing economy), it won’t be easy. We need to think about what can be done to manage this. Revenue should increase. If they don’t, we will have to cut spending. The other option is to borrow more, but then we would like to maintain a reasonable degree of predictability. So the space for maneuver is shrinking,” said an official involved in the talks.

Additional expenditures related to the inflation of the subsidy bill and any further expansion of the free food grain program are seen as an increased fiscal burden, which may necessitate a reduction in public spending. Some signs of expenditure rationalization are already visible. While April-August investment growth jumped 46.81%, the Center’s noninterest income expense growth contracted 3.31% over the same period. “This (contraction) is a bit puzzling as to why the Union government is restricting its budgeted spending when there is no deficit on the tax revenue front,” said Sunil Sinha, economist Principal, India Ratings.

The budget had set the budget deficit at 6.4% of GDP for 2022-23, which it expects to maintain given the rise in nominal GDP due to high inflation. In review meetings beginning Monday, programs that have not seen substantial drawdowns are expected to be halted.

Another big concern is on the external front, with fears of further aggressive rate hikes from the Federal Reserve leading to capital outflows from FIIs. India’s current account financing needs continue to be large, with the current year deficit expected to widen to levels last seen in 2013. decline due to a global slowdown led to an increase in the trade deficit. It widened to $26.72 billion as exports fell 3.52% to $32.62 billion in September.

The contagion effects of continued aggressive monetary tightening in the United States, the Chinese slowdown due to a tough Covid-19 policy and the unpredictability of crude oil prices given a volatile geopolitical scenario did not only complicate the management of the external sector. Central bank intervention in the currency market to prevent the rupee from depreciating further against the US dollar has already led to a sharp decline in the country’s foreign exchange reserves.

There is some comfort to be drawn from a further moderation in commodity prices due to the dissipation of demand in the global economy. Crude remains a lingering concern, however, and with oil prices still boiling, what is of particular concern to policymakers is the limited wiggle room available to pass on benefits during short windows of low prices. The implication being that inflation may stay elevated longer than expected because fiscal intervention through higher subsidies may not be prudent.

On the growth front, a major concern is that private investment is not showing significant signs of recovery. Union Finance Minister Nirmala Sitharaman recently had to push the industry to step up investment in a recent interaction. The government’s gamble on concentrating private investment has not yielded much success “despite multiple political interventions”, a government official said.

Given the complexity, a constant refrain among policymakers these days is that fiscal and monetary policies must be in harmony. “The signs are not too bright globally. So you have to keep the armor. We have to be as careful as possible. It is important that fiscal and monetary policies are mutually supportive rather than working against the tide,” said another official involved in the deliberations.

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