The 4 things you can expect on the economic front in 2023

The Union budget will be presented by Finance Minister Nirmala Sitharaman on February 1. What will be the focus of the budget?

The Union budget is typically more than a presentation of the Union government’s accounts. It outlines the broad policy thrust of the government of the day. This Union budget will be presented against the backdrop of growing concerns over the slowing down of the underlying growth momentum.

The budget also comes at a time when many are hoping that India emerges as a favourite investment decision for companies looking to diversify away from China. Then there is also the electoral cycle to consider – as general elections will be held in 2024, there is always the possibility that some of the policies/proposals in the budget are influenced by their potential electoral impact.

Thus, broadly speaking, the budget will be judged for the vision it articulates, and what policies it proposes as India tries to navigate through this period of uncertainty. More specifically though, it will be assessed on the extent to which the government is able to provide support to the economy, while at the same time being mindful of its finances.

It would have to be seen to what extent will the government be able to ramp up spending, especially on capital expenditure; whether it can announce cuts in income taxes or simplify the capital gains tax regime; and how it tackles the challenges of facilitating investments and creating employment opportunities in the economy.

What will be the trajectory of interest rates both globally and domestically?

The year 2022 was when central banks across the world stepped up the fight against inflation. So far the US Federal Reserve has raised interest rates in seven consecutive meetings, with the interest rate now at 4.25 to 4.5 per cent. The projections released by the Fed indicate that interest rates will likely touch 5.1 per cent by next year. As of now, the forecasts presented by the central bank rule out the possibility of any rate cuts next year. Thus rates are likely to remain higher for longer.

On the domestic front, the monetary policy committee (MPC) of the RBI has also been raising rates to tackle surging inflation. So far, it has raised interest rates from 4 per cent to 6.25 per cent. While the RBI/MPC does not provide any projection on the interest rate trajectory, the minutes of the last MPC meeting seem to suggest that a majority of the committee members are of the view that inflation continues to be a concern.

Some members are however of the view that as the impact of monetary policy on inflation comes with a lag, now is an appropriate time to take a pause to see how inflation evolves.

But the tone of the majority of the members raises the possibility of another rate hike when the MPC meets next in February. But considering the growing differences of opinion in the committee, a pause thereafter cannot be ruled out.

What are the prospects for the Indian and the global economy?

Higher interest rates, by raising the cost of borrowing for everyone in the economy, have a negative impact on both consumer and investment demand. This will cause economic activity to slow down. This is already playing out in the US. The Fed has projected the economy to grow at 0.5 per cent in 2023, down from its earlier assessment of 1.2 per cent. The unemployment rate is expected to go up to 4.6 per cent next year.

The effects of this slowdown in developed economies, especially the US, are already beginning to be felt around the world. India’s exports have been slowing down sharply in recent months. And industrial production has also fallen. Thus, the country’s growth prospects for the second half of this year and the next year will be heavily weighed down by how sharply the developed economies slow down.

What are the chances that the Russia-Ukraine conflict will come to an end?

Recently, Vladimir Putin did indicate that Russia was ready for talks to end the war. However, the comments came amid continuing bombardment by Russia on Ukrainian towns. Considering the positions of both sides, the prospects of immediate negotiations translating into a peace deal appear bleak at the moment. While the war has now been going on for 10 months, the possibility of a continuing long drawn-out military battle cannot be ruled out.