Amid criticism that the Budget for FY23 has underestimated the so-called gross domestic product (GDP) deflator despite elevated price pressure in the economy, the finance ministry said on Wednesday that global inflation and energy prices will likely moderate in the next fiscal, allowing the projection to hold true.
While estimating a nominal GDP expansion of 11.1%, the Budget has projected a real growth rate of about 8% for the next fiscal and the implied GDP deflator, used to compute real expansion from nominal, is pegged at 3-3.5%, the ministry said. This is in sync with the growth rate of 8-8.5% projected by the Economic Survey for FY23 and is close to the Reserve Bank of India’s (RBI’s) forecast of 7.8%, it added.
In its report for January, the department of economic affairs (DEA) asserted that retail inflation will likely close within the RBI’s target band of 2-6% despite a spurt in price pressure in recent months. Between April and January this fiscal, retail inflation stood at an average of 5.3%, although it scaled a seven-month peak of 6.01% last month. Presenting an optimistic picture of the economy, the report stressed it’s “on its way” to growing at above 9% in the current fiscal, as projected by the National Statistical Office, despite the Omicron effect.
In an interview to FE earlier this month, DEA secretary Ajay Seth had said the GDP deflator would drop, as wholesale price index (WPI), which typically influences the deflator more than retail inflation, could ease considerably next fiscal due to a favourable base effect and a possible softening of global commodity prices in the wake of liquidity tightening measures by key central banks. WPI inflation averaged as much as 12.5% between April and December.
The report conceded that private consumption, the principal pillar of the economy that is yet to return to the pre-Covid level, will “grow cautiously as precautionary demand for money will rise at every hint of a new infection”. It will pick up once Covid-related uncertainty wanes. Consequently, demand revival will prompt the private sector to boost investments and augment production to cater for rising consumption.
The long-elusive private investment will get the necessary help from the complementary support of public investment in infrastructure and continue to gain traction from the Atmanirbhar Bharat initiative, it said. Production-linked incentive schemes (PLI) schemes will further draw private investment and drive up export growth. Manufacturing and construction sectors will be the “growth drivers”, supported by the PLI schemes and public capex in infrastructure.
The Centre’s budgetary capital spending is estimated to rise 36% to a record Rs 7.5 lakh crore in FY23 from the revised estimate for FY22 (excluding capital infusion into Air India). Its capex next fiscal will more than double from the pre-pandemic (FY20) level. The Budget’s “commitment towards asset creation (public infrastructure development) will invigorate the virtuous cycle of investment and crowd in private investment with large multiplier effects which in turn will augment inclusive and sustainable growth”, the report said.
“The unchanged repo and reverse repo rate along with the MPCs (Monetary Policy Committee’s) accommodative stance prioritise growth during these uncertain times and reinforce the investment orientation of the Budget. Should retail inflation remain range-bound at 4.5% as projected by the MPC in 2022-23, liquidity levels in the economy will remain high and interface with low interest rates to provide easier financing options to industry and individuals,” the DEA said in the report.
