Year-ends are for ruminating over what transpired during the year, and the lessons learnt. In this world of uncertainty, forecasting the next 365 days would be interesting, as the coming year will be crucial for us, considering India will, at least statistically, continue to present better growth numbers than most countries. But let’s see what forces will work through the year 2023.
First, no one knows when the war in Ukraine will end, but this may not matter as 2022 showed that, even as the war rages, economic surprises are minimal.
Countries have adjusted to commodity flows and supply-chain disruptions, with prices returning to normal. While the world is against Russia’s invasion, the power the nation holds over supplies of oil and gas has helped it keep its own in the economic arena.
Second, the Fed’s stringent tightening of interest rates, followed by other central banks, is now a known factor, with the direction being clear. The Fed will be taking the rate to around 5%, and will then take a pause as it would need to wait for these rate hikes to work on inflation (which happens only with a lag). While a reduction in Fed rate looks unlikely in 2023, a long pause is expected during the year.
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Third, the dollar is already reverting to its normal, and the appreciation seen in 2022 will be a thing of the past. The dollar had crossed the parity level this year, with the US economy becoming stronger by the day—which called for Fed action. This will be comforting for the world as all currencies fell against the dollar; the adjustments were fairly volatile. In 2023, fundamentals are more likely to drive currencies.
Fourth, as the days of easy money are over, unless the Fed starts QE under a different brand name (unlikely as of now), investment flows would be restricted and more discerning. For India, which depends on FPI and FDI to a considerable extent to steady the balance of payments, this will be something to watch.
Fifth, RBI will be taking a breather first, followed by a change in stance on accommodation, before finally looking at lowering rates. A rate hike in February looks likely as inflation will be above the 6% mark. But with the inflation rate moving down post March, one may expect RBI
Sixth, the government will hold an important lever when the Budget is announced. The fiscal deficit for FY24 will be more or less in range, helped by higher revenue earned as well as a larger base of nominal GDP, which will make up for the higher expenditure on account of food and fertiliser subsidies. The government is expected to go along the fiscal deficit prudency path and could target a deficit of 5.5-6% for FY24. Additional capex will be limited and in alignment with the growth in the overall size of the budget. In FY24, nominal GDP growth would be expected to be lower due to both real GDP and inflation (GDP deflator) being lower.
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Seventh, the external scene for India will be under pressure. The trade deficit will be wider with exports slowing down further, but imports rising (India will still be the faster growing economy, which necessitates more non-oil imports). This, combined with a possible slowdown in software flows, can keep the current account deficit in the range of 3-3.5% for another year.
Eighth, the currency will be largely stable, with the average depreciation being replicated, possibly between 3-4%. In 2022, the strengthening dollar caused substantial chaos in the market. This external factor will be less potent this year.
Ninth, the banking sector will be more robust in terms of business, especially since the two major challenges of capital and quality of assets will be behind us. The focus will be more on furthering digitisation and lending. Here, we may expect the new financial institution to take some shape so that another tap opens for finance for infrastructure.
Lastly, the capital market will probably continue to witness buoyancy in both segments. As the economy grows, the IPO market will tend to look positive, with companies seeking to raise capital. The secondary market should ideally reflect the generally stable fundamentals of the economy and maintain the upward path.
While Sensex at 65,000 looks possible, anything above would be bordering on optimism as there will be phases when the global economic developments have an impact on domestic markets.
It would be a gradual movement to normal in 2023, with guarded monetary and fiscal policy that supports growth. This could be the appropriate platform for the economy to move to a higher trajectory in 2024.
The author is Chief economist, Bank of Baroda
Views are personal