Opinion

DC Edit | Will poll-eve Budget put a cap on inflation?

1 February 2023

On the eve of the Union Budget day, finance minister Nirmala Sitharaman completed the pre-Budget ritual of tabling the Economic Survey in the Lok Sabha. The Survey is a public document which gives a glimpse of the state of the economy by studying various facets of the economic activity in the country. The Economic Survey 2023, prepared by the chief economic adviser, V. Anantha Nageswaran, spreads into 414 pages, discussing 12 major topics. 

From a bird’s eye view, the Survey exudes confidence about the course of the Indian economy — the country will continue to be the fastest growing major economy, albeit slowing down its pace a little, inflation remaining at manageable levels, though above the ideal band of inflation that RBI wants it to be, credit growth is robust, and private sector is slowly getting back into the investment mode and many more.

Notwithstanding the macroeconomic issues that were discussed in the Survey, three topics would affect people’s spending power directly — inflation, interest rates and rupee value. On all these topics, the Survey remains cautious. It forecasts an inflation rate of 6.8 per cent for the upcoming financial year. Though the inflation in the next fiscal is expected to be lower than the current fiscal, it is still above the RBI’s comfort zone of six per cent. The Survey, therefore, believes that interest rates will continue to be elevated in the financial year 2023-24. The Survey also predicts that the US dollar will continue to get strengthened, weakening the rupee further. 

How would this fare on people’s family budgets? 

A weak rupee will make them shell out more for almost everything — all imported goods would anyway get costlier but even the prices of made-in-India goods will pinch your pockets because higher transportation costs would be passed on to every product. This will increase inflation. 

If inflation is high, the Survey says RBI would keep interest rates high, which would make loan EMIs high, partially affecting the demand of high-ticket products.

A higher inflation would also eat into people’s disposable incomes, bringing down their discretionary spending. When people don’t have money for discretionary spending, the private sector would remain cautious to expand their industrial activity and thereby create more jobs. 

If the private sector won’t increase their investments, the government will have to chip in through public capital expenditure, which means a higher borrowing and a higher fiscal deficit. The fiscal deficit would further weaken the rupee. If the government doesn’t make capital investments, it will affect economic growth. However, the government does not need to worry about money being pumped into the economy because the country would shortly enter into the election year, which entails humongous amounts of spending by political parties and would take care of investment requirements. So let us hope the government will take care of inflation. The value of the rupee is anyway decided by Russia, Ukraine and Saudi Arabia’s actions.

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