The confluence of inflation, GDP growth and existing policies is likely to contribute to Finance Minister Nirmala Sitharaman's interim Budget for FY25.
Sitharaman will be presenting her sixth Budget in February, which will be a vote-on-account owing to the general elections scheduled in 2024. The full Budget will be rolled out post the formation of the new government after general elections in April-May.
However, the preparation of fiscal strategies to lay the groundwork for sustained growth and resilience in the next fiscal might be influenced by the current economic landscape.
Let us look at how the economic indicators have shaped within the last one year:
Evolution of inflation, GDP numbers
The Reserve Bank of India (RBI) at the beginning of the year was tasked with bringing down the high inflation levels within its tolerance band of 2-6 per cent.
In January 2023 (FY23), the retail inflation had surged dramatically to 6.52 per cent after dipping for two months. Apart from an unfavourable base, the burning prices of food (which accounts for almost 40 per cent of the Consumer Price Index) fueled the inflation level.
The nation's Gross Domestic Product (GDP) growth remains a linchpin in economic deliberations. Despite global uncertainties, India's GDP has shown resilience, with incremental progress observed in recent quarters. The growth trajectory, albeit gradual, signifies a foundation for potential policy adjustments. The Budget '24 is expected to leverage this forward momentum to bolster key sectors and stimulate economic activities.
Similarly, the Gross Domestic Product (GDP) growth rate had also declined in FY23. In Q3, India’s GDP had moderated to 4.4 per cent. The GDP had moderated to 6.3 per cent in the Q2FY23 from 13.5 per cent in Q1FY23 largely due to pandemic-related statistical distortions. However, the Q4 numbers surprised the citizens as it surpassed the expectations of analysts, experts.
A stronger-than-expected fourth quarter lifted India's growth to 7.2 per cent in FY23, exceeding the 7 per cent cited in the second advance estimates released in February, underscoring the country's economic resilience in the face of multiple challenges.
Coming back to the recent data, the Q2 numbers for FY24 also left economists startled as it was beyond what they had expected. The number stood at 7.6 per cent as against a four-year high of 7.8 per cent in the previous quarter.
Likwise, the inflation number this year also moderated and largely remained within the RBI's comfort zone in H2. The recent inflation print for November stood at 5.5 per cent on an annual basis.
The food prices and continuous global crisis may disturb the robust economic numbers creating a difficult situation for the policymakers.
How these economic factors can draw policymakers' attention before Interim Budget
At the forefront of budgetary considerations is the prevailing inflation rate. The inflation level has maintained a steady course, posing both challenges and opportunities for policymakers.
The Consumer Price Index (CPI) continues to be a crucial metric, reflecting the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. This stability, or lack thereof, is anticipated to play a pivotal role in determining the fiscal strategies adopted in Budget '24.
According to a Deloitte report, "The Concerns around rising prices are at the top of mind for policymakers. High food prices, especially double-digit growth in pulses and cereals, which have a significant share in the CPI food basket, are concerning. Moreover, oil prices started trending up quickly. Food and fuel prices are likely to keep inflation high. Despite the RBI raising rates to 6.5 percent since April 2022, inflation remained above its tolerance range."
The nation's Gross Domestic Product (GDP) growth remains a linchpin in economic deliberations. The global uncertainties are weighing on investors and policymakers across the world, as per the Deloitte report.
As the Israel and Palestine war intensifies, there are fears that the regional dispute could prolong and have a contagion impact on global supply chains and the economy. "The ongoing Israel-Hamas conflict could destabilise already tense steel and oil supply chains worldwide. Crude price of US$90/bbl will put further stress on India’s current account deficit. Higher import bills and a slowdown in export growth amidst a global slowdown can push the trade deficit high," it said.
Furthermore, the report stated that the consumer spending has seen a strong revival after the pandemic in the high-income segment. Services such as travel and hospitality, and sale of high-end vehicles in the passenger vehicle segment have seen a surge, pointing to pent-up demand amongst the top income percentile of the population. However, the rural demand has not yet seen sustainable growth.
However, segments such as FMCG, entry-level auto segments, and two-wheelers have yet to pick up sustainably. The rising policy rates have also put pressure on household borrowings as EMIs have gone up.
In addition, the spatial and erratic monsoon has further added to stress on rural spending abilities.
As the government gears up for Budget '24, the groundwork laid by existing policies forms a critical backdrop. Whether in the realms of taxation, investment incentives, or welfare programs, these policies have far-reaching implications for the economy. The principle of continuity and strategic realignment is likely to guide budgetary decisions, ensuring a seamless transition while addressing evolving economic demands
