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Budget 2023: Policymaking To Get Trickier In Next 12 Months, Says JPMorgan's Sajjid Chinoy

Focus will have to be on macroeconomic stability while being mindful of the slowdown, Chinoy said.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

Policymaking over the next 12 months could be even more tricky and involve a greater balancing act than it has been in the past year, according to Sajjid Chinoy, a member of the Economic Advisory Council to the Prime Minister.

At this time last year, economies were recuperating from the pandemic, and the decision and debate in the budget was how much support the government could pull back, said Chinoy, who is the managing director and chief India economist at J.P. Morgan Ltd.

"This year, we're in a new gambit, with simultaneous supply and demand shocks."

These have pushed up inflation around the world and, to counter that, central banks have undertaken the most aggressive and coordinated monetary tightening since the 1980s.

"The combination of both of these places (the) emerging markets in a tricky situation in the next 12 months because we have to anticipate a slowdown globally," he said.

Chinoy added that global growth would likely go from 3% in 2022 to about 1.7 or 1.8% in 2023, meaning that policy should be more supportive.

He pointed out that inflation really hasn't rolled off and current account deficits are still at an uncomfortable level because commodity prices, though having come off, are still quite elevated.

"So, I think from the budget's perspective, this has to be a careful balancing act, where the budget's focus will have to be on macroeconomic stability, while also being mindful of the slowdown in growth that is upon us in the coming quarters," Chinoy said.

Watch the full conversation here:

Edited Excerpts From The Conversation

There is a fiscal glide path that markets would anticipate the government to take, given it's a pre-election year. Also, how do you think the government will navigate the nature of its spending—whether it is on capex and infrastructure-related items, or to aid the rural consumer?

For macro stability, there are two elements. One is to continue doggedly with fiscal consolidation because our starting points are elevated.

The central and state deficits, including the PSU borrowing, are close to 10% of GDP. That will warrant us bringing those deficits down. Fiscal management has been excellent in recent years, with the government meeting or exceeding its fiscal deficit target each time. This was again a very difficult year with lots of fiscal pressures, and the government deserves a lot of credit for reiterating its commitment to stick to the target of 6.4%.

So, from a market perspective, the first thing to do is take away the uncertainty. The government has committed to a fiscal deficit glide path of 2% of GDP over the next three years. So if we get about 0.5-0.6% of GDP consolidation this year, the deficit goes from 6.4% to 5.8% or 5.9%. That will be very much in line with what markets expect, and therefore, it will take away uncertainty.

Secondly, having a medium-term fiscal anchor will be useful because, in an environment of so much uncertainty, both globally and domestically, the best thing that policy can do is reduce uncertainty and create stability, constancy, and consistency. Having a medium-term debt anchor, whether we want to stabilise the debt at current levels or gradually bring it down, will just give market investors and rating agencies something to hang their hats on.

On growth, when deficits come down at the margin, that impinges on demand. But another area where the government's been very good is prioritising capital expenditure. The government decided in 2020 that sustained public investment and infrastructure spending were going to be India's ticket out of the pandemic, and the job creation that comes with it is crucial to recovering from this pandemic.

To the extent that capex keeps moving up and the quality of expenditure improves with larger multiplier effects, this is the best support that the budget can offer for growth.

With nominal GDP falling, tax buoyancy is likely to fall, and lower disinvestment receipts, is the government equipped to continue on the path of higher capex while also attempting to boost rural consumer sentiment through spending—critical in a pre-election year? 

Here's how I would think about the fiscal map for next year. If we end at 6.4% of GDP this year, and we're budgeting half a percent of consolidation, there's a pretty straightforward path to get there.

The government has already done the heavy lifting. What you saw in December was the deft manner in which the food subsidy bill was tapered. Food subsidy was under the National Food Security programme, and there was a special allowance in the pandemic. Those got combined and rationalised. That alone- lower food subsidies next year, and some expected tapering of fertiliser subsidies because global fertiliser prices are down, should shave off half a percent of GDP.

Just considering the growth risks that you've touched upon. Does the government also need to be careful to not tighten too much?

That's exactly right. There is a 2% of GDP consolidation over the next three years. This doesn't need to be linear. About half a percent this year would be par for the course, just given the growth rates that we anticipate down the road. Hopefully a year from now, when any kind of global slowdown or recession is behind us, and in the first year of the of the next government's term, one can front load the consolidation then and do much more at that point in time when you've got more confidence that domestic and global growth rebounds.

The government in general has been transparent in budgeting. It's been very conservative and realistic in terms of deficit reduction and the revenue side and it's been very efficient in the sense that capex has been prioritised over revenue expenditure.

So, those same three principles of being realistic about taxes and consolidation, being transparent, and being efficient in terms of expenditure delivery should again, be the hallmark of this year.

What would the money markets be happy with and what would worry them?

I think what bond markets will be kind of happy with or relaxed with is just no unpleasant surprises. Bond markets have internalised the fact that we will get 0.5-0.6% of consolidation as a share of GDP next year and consolidation of 2% of the GDP in the next three years. There is a belief that there's a little bit more borrowing that could happen for this year because even if the government sticks to deficit target of 6.4%, it'll have a larger denominator- nominal GDP this year will be higher. But that's also something bond markets have internalised.

From a bond market perspective, real bond yields are very comfortable. If there are no large unpleasant surprises, which I don't foresee in terms of deficit numbers and borrowing numbers, I think the borrowing programme should go through without any incident in the coming year.

What's the impetus on growth do you reckon the government would explicitly lay out at a point of time when growth the world over might be constrained?

For growth, we need to be patient and realise the global setting we are in. But for me, it's all about jobs. The fact is, if you look at the demand side, of exports, imports, gross fixed capital formation and consumption, while consumption is making a smart recovery, it's still the slowest sector to recover. That's to be expected, because you need an even more sustained jobs recovery.

We need to continue with public investment because that construction work will create jobs at the bottom of the pyramid, and alleviate some of the scarring from the pandemic. It means continuing with reforms to grab this once in a lifetime opportunity of China vacating large amounts of space in the labour intensive, unskilled, low skilled industries.

The question is, what do we do to boost potential growth over the next three to five years? I think grabbing the export opportunity, focusing on infrastructure, and continue with more reforms will be what I'd be looking for.