Need to address growth, inflation concerns in upcoming Union Budget 2023-24

An impending global slowdown will imply that investors will be prudent about investing and focus on economic fundamentals. The most important criteria for risk assessment will be the growth outlook and its stability. The good news is India scores high on growth.

A large part of the inflation in India has been driven by food and fuel prices. However, prolonged high inflation is also feeding into core inflation and inflation expectations, which means people could well change their behaviour expecting prices to remain high. (Image: Pexels)

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Apart from the customary change in dates, very little in the new year feels different from the one gone by for the global economy. Geopolitical uncertainties continue unabated, a legacy of the last year, and there’s wide consensus among economists now that the global economy is on the verge of entering a phase of severe slowdown.

It is unlikely that India will remain insulated from these developments. But here is a bit of good news as far as India’s economy goes—there are enough reasons to be optimistic about India’s economic outlook in 2023, and the domestic drivers will likely help the country post reasonably strong growth this year. That said, there are significant headwinds that India faces, and a key differentiator would be the course India takes in charting inflation and growth trajectories over the next year amidst a global slowdown.

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An impending global slowdown will imply that investors will be prudent about investing and focus on economic fundamentals. The most important criteria for risk assessment will be the growth outlook and its stability. The good news is India scores high on growth. The worrisome news is that inflation is expected to persist.

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A large part of the inflation in India has been driven by food and fuel prices. However, prolonged high inflation is also feeding into core inflation and inflation expectations, which means people could well change their behaviour expecting prices to remain high. This may result in consumers postponing purchases, and therefore, delaying the demand pickup. This may also result in producers raising prices of goods assuming that the higher production costs will persist.

Recent data suggests that inflation may have peaked and slowly come down, partially because of the high base effect. However, relatively higher oil prices, a stronger US dollar (USD), and supply chain interruptions in certain industries will keep prices above RBI’s comfort level.

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While the growth-inflation dynamics will continue to evolve, there will be expectations that the government takes steps to strike the right balance in managing the two objectives. India has huge potential as an export hub and investment destination in manufacturing and especially in services sectors, where it has competencies and comparative advantage. With the right coverage of the production-linked incentives (PLI), customs duties and tax incentives, and well-executed infrastructure programs, the government can boost both sectors as well as create employment to generate demand.

India must also aim at trade agreements that aim at integrating the manufacturing sector with the global supply chain while attracting investments in sectors that drive long-term growth. India must also look at diversifying sources of investment. Lately, there has been a sharp drop in FDI from the US, yet India has also seen a healthy rise in FDI equity flows from Japan, Singapore, the United Kingdom, and United Arab Emirates in H1 FY2022-23. The destination sectors have also diversified with infrastructure, non-IT services, and chemicals witnessing ample inflows. The government must make efforts to amplify this trend.

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Addressing supply bottlenecks will be another priority for the government. The government must accelerate its efforts toward building multi-modal infrastructure connectivity and improving last-mile connectivity to bring down logistics costs. Optimizing the food and agribusiness supply chain and ensuring proper storage and inventory will be critical in dealing with demand-supply fluctuations.

Job creation has improved lately but not to the extent that wage growth beats inflation. Opportunities and wage growth remain skewed, impacting the low and middle-income population. So far, the government’s focus has rightly been on sectors that create jobs for workers across all skills, such as infrastructure, construction, and manufacturing. Going forward, the government must incentivise the services sector, which too has huge potential to contribute to employment. With competency and a comparative advantage in a few services such as IT and IT-enabled services, the government can incentivise MNCs to set up global in-house centres in this sector.

We believe a few of these measures will help India deal with challenges better and stay the course to resilient albeit lengthier path to recovery.

(The article has been authored by Richa Gupta, Partner and Rumki Majumdar, Economist, Deloitte India. Views expressed are personal)