Preface of the Budget 2023

  

The Economic Survey 2022-23 comes when  global uncertainties are rife. Barely had the pandemic receded,  and the war in Ukraine broke out in February 2022. Prices of food, fuel and fertiliser rose sharply. As inflation rates accelerated, central banks of advanced countries scrambled to respond with monetary policy tightening. Many  developing countries, particularly in the South Asian region, faced severe economic stress as the combination of  weaker currencies, higher import prices, the rising cost of living and a stronger dollar, making debt servicing more  expensive, proved too much to handle.

 

In the second half of 2022, there was a respite for governments and households. Commodity prices peaked  and then declined. In the near term, the acute pressure was relieved, although prices of some commodities (e.g.,  crude oil) remain well above their pre-pandemic levels. For countries dependent on imports, priced and payable in  dollars, a global slowdown led by the United States (US) offers a triple relief. Commodity prices decline, and US

interest rates peak, as does the US dollar. Capital and current account imbalances abate. 

  As 2023 rolled in, China opened up rather swiftly, reversing its Zero-Covid policy. An unexpectedly warm winter that has spared households from a debilitating increase in fuel prices that would have dented their disposable income  significantly hasstirred hopesthat the Eurozone economies would narrowly avoid a recession.Asthe headline inflation rate declines in the US, policy rates are set to rise more slowly. In anticipation, bond yields have come down, and there  are faint hopes of the US avoiding a recession altogether, barring any unexpected financial system stress.

 

Lower chances of a downturn in advanced economies and resumption of economic activity bring with them hopes  for some developing economies that are export-dependent and concerns for those who are heavily import-dependent for essential commodities. In anticipation of higher-than-earlier forecasted demand, crude oil prices have begun to  climb, as have the prices of industrial metals. Wage negotiations are leading to upward revisions on either side of the  Atlantic. Meaningful interest rate reductions in the US and the Eurozone may not materialise as quickly as one would have hoped. The year promises to be far from predictable and may hold surprises for countries and households.

 

For India, 2022 was special. It marked the 75th year of India’s Independence. India became the world’s fifth largest economy, measured in current dollars. Come March, the nominal GDP of India will be around US$ 3.5  trillion. In real terms, the economy is expected to grow at 7 per cent for the year ending March 2023. This follows an 8.7 per cent growth in the previous financial year. The rise in consumer prices has slowed considerably. The annual rate of inflation is below 6 per cent. Wholesale prices are rising at a rate below 5 per cent. The export of goods and services in the first nine months of the financial year (April – December) is up 16 per cent compared to the same period in 2021-22. Although the high oil price this year compared to last inflated India’s import bill and caused the merchandise trade deficit to balloon, concerns over the current account deficit and its financing have ebbed as the year rolled on. Foreign exchange reserve levels are comfortable and external debt is low.

 

India had a good monsoon, and reservoir levels are higher than last year and the 10-year average. The  fundamentals of the Indian economy are sound as it enters its Amrit Kaal, the 25-year journey towards its centenary  as a modern, independent nation. Policies pursued carefully and consciously have ensured that the recovery is  robust and sustainable. This is the context in which the Economic Survey undertakes an assessment of the economy  in the present, in the light of the recent past and examines its prospects in the coming years. Before I give you an overview of what awaits inside the pages of the Economic Survey of 2022-23, it is worth reiterating that the year  is still ongoing, and the survey is based on nine months of data at best or eight mostly.

 

As per convention, the first chapter examines the state of the economy and how it has come through yet another year of twists and turns in the worlds of economics and politics. As the impact of the pandemic recedes – Japan is about to downgrade it into seasonal flu, and Denmark might have done so already - Chapter 2 analyses India’s medium-term economic outlook and concludes that it looks bright. It is an analysis of the financial cycles and the role it plays in influencing economic growth over the medium term. India’s financial cycle endured a downturn last decade because credit expansion in the millennium’s first decade ultimately proved unsustainable. The financial history of the world suggests that the outcome was unsurprising. The rapid expansion of credit, fuelled by copious capital flow, has invariably foretold a financial crisis. India was no exception. The chapter tells the story of how the government navigated the economy through a period of financial stress wherein corporate, banking and non banking balance sheets were repaired and restored to health. Not letting the crisis go waste (i.e., fashioning an effective policy response to the crisis and beyond), the government ramped up public investment in infrastructure to prepare the ground for the private sector to invest, hire and prosper. It records the wide-ranging structural reforms  and governance improvements that the government has undertaken since 2014. 

 

While reforms before 2014 addressed product and capital markets, reforms since then have emphasised  enhancing the ease of living and doing business to improve economic efficiency. The key principles on which these policies have been anchored are creating public goods, adopting trust-based governance, partnering with the private  sector for development and improving agricultural productivity. With cleaner, leaner and stronger balance sheets  and payoffs flowing from reforms, India’s potential growth stands elevated, and the ability of the economy to grow at its potential is enhanced. Without making extravagant claims, the chapter concludes with optimism about India’s medium-term outlook.

 

Chapter 3 focuses on India’s fiscal policy trajectory and examines the evolution of the Goods and Services Tax as a source of durable and dependable revenue for states and the centre. Given India’s demographic advantage and  annual nominal GDP growth potential to be around 10 per cent to 12 per cent on average in the coming years, fiscal parameters will continue to improve. It is said that growth drives the fiscal balance in India, and it is true. At the same time, it is possible to imagine fiscal discipline turning into fiscal stimulus in future, as it would bring down the government’s cost of borrowing, lowering the present high share of interest payments in public expenditure and making more money available for economic development and social welfare. 

 

Money, Banking and Capital Markets are the subjects of Chapter 4. During the year, the Reserve Bank of India  (RBI) raised interest rates swiftly to prevent the second-round effects of the inflation shock from commodities from affecting economic activity. That played a big part in the relative stability of the Indian rupee against the US dollar in a year of dollar strength. That India’s import cover and external debt ratios are not matters of concern is largely due to India’s long-standing conservative external borrowing policies and RBI’s deft management of foreign exchange reserves. India’s capital markets have been a historical success story. International benchmark indices of Indian stocks have outperformed their emerging market and global peers over the long haul. In short,  Indian stocks have rewarded investors well over the years. Foreign portfolio investors have significantly benefited from that. The last two years have also seen a rise in the participation of Indian domestic retail investors in big  numbers in Indian stocks. Not only did their investments cushion the impact of portfolio outflows that occur from time to time, but they also added to their wealth stock, given the performance of Indian stocks in 2021 and 2022.

 

The following chapter on prices is a story of the convergence of India’s wholesale and retail prices throughout  the year. India’s wholesale price inflation leapt to 16.6 per cent in May 2022, and the gap between wholesale price inflation and consumer price inflation widened. When the wholesale price inflation is high, there is always a risk that it will pass through to retail prices. The gap or the wedge between the two closed by the end of the year as  global commodity prices retreated and the government took proactive measures to rein in their domestic prices. 

 

In a departure from the past, we introduce the chapter on India’s social sector (Chapter 6) next, followed by the chapter on climate change and environment (Chapter 7) and not without reason. Social welfare is not an  afterthought for the government but its leitmotif. The comprehensive and ‘leave no one behind’ approach that the  government has adopted for social welfare gets full treatment in this chapter. The chapter highlights how the use  of technology has enhanced the quality of life for citizens to ensure the reach of social sector schemes to intended beneficiaries, especially during the pandemic. The transformations in the lives of the citizens happening through the Aspirational Districts Programme, Direct Benefit Transfers, use of Aadhaar and various initiatives in the education, health and basic infrastructure availability are highlights of the chapter. The thirteen boxes that the chapter features – an unusually large number - are an acknowledgement of the myriad innovations in social welfare schemes and in their delivery that the government has embraced and implemented.

 

Climate change and the environment are not only hot-button issues globally but are critical to India realising  its aspirations. Hence, India currently spearheads one of the most robust climate actions through its Nationally  Determined Contributions (NDC), which includes an ambitious programme for transitions to clean energy in the  world. Despite the adverse impacts of Covid-19 on the economy, the country has enhanced its climate ambition  manifold.

 

The health of the farm sector is critical for the economic and social well-being of the country. India has achieved  domestic food security and has become a net exporter of farm output to the world. The potential is larger. Chapter 8 documents India’s transition from food security to nutritional security and the importance that the government  accords agricultural productivity.

 

Chapters 9 to 12 are bread-and-butter features of the Economic Survey. They deal with Industry, Services, the  External Sector and Infrastructure in that order. Indian industry, as mentioned earlier, is on the cusp of a growth revival facilitated by public investment and policies that have eased business conditions and improved viability.  Bank credit to industry has picked up momentum, particularly for micro, small and medium enterprises. Among  other things, the pandemic had caused a shift in the attitude towards supply chains from efficiency to security and from ‘just in time’to ‘just in case’. Supply chains are being reconfigured. The government senses a big opportunity here, and its investment into and commitment towards Production-Linked-Incentive Scheme demonstrates its  determination to plug India into global supply chains. It is an industrial policy with a global vision. India now has  the physical and digital infrastructure to raise the share of the manufacturing sector in the economy and make a  realistic bid to be an important player in global supply chains. In the last eight years, the government has created  just the platform for this ambition to be fulfilled. The prognosis, I dare say, is bright.

India’s services sector is a source of strength and is poised to gain more. India is large enough to accommodate  and nurture vibrant manufacturing and services sectors. From low to high value-added activities with export potential, the sector has enough scope to generate employment and foreign exchange and contribute to India’s external stability.

 

As a country with a large merchandise trade deficit because of its dependence on imported fuel, the external sector is always watched closely, especially during rising oil prices. This financial year is one such year. Various arms of the government ensured that, in a year of extreme supply uncertainty and price volatility, India’s energy security was not compromised. A slowdown in global growth has led to slower export growth, but the combined value of goods and services exports in current dollars for April – December 2022 is 16 per cent higher than in April –December 2021. India’s foreign direct investment has been steady, and investors’ interest in including India in their supply chain diversification is now noticeably higher. PM Gati Shakti and the National Logistics Policy are  expected to play big roles in improving India’s cost and export competitiveness in the years ahead.

 

That brings us to the twelfth and last chapter of the survey. It is on infrastructure. ‘Last but not least’ is clichéd,  but in this case, it is a truthful cliché. We have kept one of India’s best success stories of recent years for the last.  In 2019, the Government of India adopted a forward-looking programmatic approach towards infrastructure. The  National Infrastructure Pipeline was born with a projected investment of around Rs. 111 lakh crore for FY20-25 for developing a comprehensive view of infrastructure development in the country. Roads, railways, and waterways  have seen unprecedented expansion in the last eight years, and ports & airports have been substantially upgraded. Extending infrastructural facilities is only part of the story; modernisation is the other important objective that has been pursued with verve and achieved with commendable speed. 

 

Finally, the growth and evolution of India’s public digital infrastructure is a story not just of numbers and  milestones but also of thoughtful regulatory and innovation architecture that have enabled it to retain its public  good character with enough incentives for the private sector to innovate and invest. The untapped potential is huge,  and the country needs to continue to innovate. With digital technology and infrastructure, one has to keep running  to hold onto one’s place. 

 

The international political and economic order that emerged at the end of World War II has developed faultlines  lately, as they inevitably do if history were any guide. Consequently, envisaged as platforms for building global  consensus, multilateral forums across the board face existential challenges today and need help to deliver on their mandates. India, with its peaceful and democratic emergence, can influence the course of events and, in the process, fulfil its aspiration to be a global power of relevance. It is befitting that during India’s Amrit Kaal, it assumed the  Presidency of G-20 nations in December 2022. Global problems need global solutions, and global solutions require  collaboration and cooperation. Based on the theme of “Vasudhaiva Kutumbakam: One Earth, One Family, One  Future”, India’s G20 Presidency aims to achieve co-ordinated solutions to key issues of global concern. These issues  include strengthening multilateral development banks for addressing shared global challenges of the 21st century,  mobilising timely and adequate climate finance, enhancing financing for pandemic preparedness, managing global macroeconomic vulnerabilities such as debt, global food & energy insecurity and financing urban infrastructure. The Presidency is a platform for India to share its success stories with the global community, especially the manner  in which Digital Public Infrastructure has supported an inclusive people-centric growth paradigm. In short, the G20  Presidency is an opportunity for India to bind an otherwise fragmented global order.

 

Putting the Economic Survey in the public domain is a learning experience. It is an exercise in cogent thinking, formulation of ideas and their effective articulation. It is, forever, a work in progress, just like the economy. While the Survey is an annual exercise, the set of officers who put this document together is never constant, and this enriches the publication every year. While old hands bring with them experience and expertise, newer entrants to the division, such as Yours Truly, bring different perspectives. I am thankful to each of them for bringing their insights, subject expertise and experience into this year’s Survey. I also thank the officers of various ministries, departments, regulators and subject experts, who provided timely inputs and enhanced this publication. I would like to thank the editorial team for their sincere efforts in preparing the draft.

 

Placing all economic activities of the country under one umbrella and refining it from the economists’ lens to a generalist’s perspective is a daunting, if worthwhile, exercise. This has been a fulfilling and worthwhile experience because it has reinforced my hope and optimism for the country and its people. I hope that the data and analysis of  the Survey will help economists, academicians, policymakers and practitioners in their pursuits. 

 

Above all, I hope it inspires the readers to partake in shaping the future of this great nation, which promises to  be every bit as glorious as its past, if not better.

 

V. Anantha Nageswaran, Chief Economic Adviser,  Ministry of Finance,  Government of India