Soon after the budget speech, the Reserve Bank of India (RBI)’s Monetary Policy Committee met and decided to raise the policy repo rate to 6.5%. Its decision not to follow a more relaxed monetary policy was based on the committee’s feeling that the outlook for inflation was mixed. In particular, it emphasised that while prospects for rabi crop looked promising, adverse weather conditions could lead to a fall in agricultural output. In addition, an unfavourable external environment would continue to exert pressure on commodity prices. The RBI felt that even with a normal monsoon, the consumer price index for 2023-24 would rise by 5.3%. This certainly suggests that the implicit assumption of inflation being contained to around 4 percent is very optimistic. It also implies that the RBI’s policy stance during the year is more likely to be anti-inflationary rather than pro-growth. So, companies are unlikely to find cheap and abundant credit available.

The global economy has certainly improved compared to what it was for much of the last year. Although there are no signs of the Russian invasion in Ukraine coming to an end any time soon, the global economy seems to have come to terms with supply chain disruptions as well as severe reductions in supplies of Russian oil and gas. There are modest signs of a recovery in output and the level of inflation is slightly lower in the majority of OECD countries as well as in the US. Despite this, governors of central banks and Finance in Europe as well as America are not sleeping any better these days. This is because wage rates have shot up and there are strong apprehensions that these countries may soon be in the midst of cost-push inflation.

It is premature to speculate on likely policy responses if there is another bout of inflation in these countries. But what is unlikely is any relaxation of the tight money policy currently in place in these countries. Moreover, there have been clear signs of protective barriers being erected on both sides of the Atlantic. So, Indian exporters will struggle to sell abroad and consequently export-oriented industries will continue to pull down the overall rate of growth. Indian importers may end up “importing” inflation if foreign prices do not come under control soon and this will further stoke inflationary pressures in the Indian economy.

A better perspective about the likelihood of achieving budget targets for the coming year is also provided by examining the performance of the economy in the current year. Unfortunately, the numbers do not look very promising. The National Statistical Office (NSO) has released new national income data only a few days ago. The NSO figures show that the economy expanded by 4.4 per cent during the third quarter of 2022-23. Combined with projections for the current quarter, this will imply that the real rate of growth of economy is likely to be less than 5% during the second half of the current fiscal year. This suggests that it will be a stiff task to achieve a real rate of growth of around 6.5% in the next fiscal year.

Disaggregated figures are also quite disappointing. The sector comprising agriculture, forestry and fishing is estimated to have grown by 3.7% in the third quarter. Unfortunately, the manufacturing sector has again performed quite dismally – it is estimated to have contracted by 1.1% during the quarter, rate, compared to a growth of 1.3% in the comparable quarter last year. Over several years now, the central government has been repeatedly emphasising the importance of the manufacturing sector as one which is vital for job creation. Clearly, the “Make in India” campaign is yet to have any real effect. There is really no reason to expect a dramatic turnaround in the performance of this sector in the next year. Of course, the nominal target of 10.5% can be achieved- perhaps even exceeded if inflationary pressures are stronger than expected. But it would be a rather “hollow” victory to achieve nominal targets while slipping up on real targets.

Finally, it is worth pointing out that the relative neglect of the social sectors is particularly disappointing if large numbers of jobs are not going to be created by the manufacturing sector. Expenditure on education and health are budgeted to go up by 8% and 3% respectively. But these increases are in nominal terms. Any reasonable assumption about the likely trajectory of prices during the year must imply only a modest real increase in the education outlay and an actual fall in real expenditure on health. One of the fastest growing countries – and we will certainly be that even if we fail to grow at 6.5% during the next year- should certainly take better care of the health of its people.

Distinguished University Professor of Economics.

The article has been authored by Bhaskar Dutta, Distinguished University Professor of Economics, Ashoka University.