Through the budget lens, to drivers beyond

The Union Budget for fiscal 2019 had to perform a tightrope walk against the backdrop of aslowing economy and fiscal duress. The upshot was proposals only mildly supportive ofeconomic growth. In all, gross domestic product’s (GDP) northward sojourn next fiscal isexpected to be driven by factors external to the budget. Fading impact of demonetizationand the Goods and Services Tax (GST) implementation hurdles, and continuing globalrecovery in both GDP and trade are expected to provide the stimuli. The weak base of fiscal2018, too, will give a statistical lift to growth.

While the budget relaxed near-term targets, its intention to accept the N K SinghCommittee’s recommendation of bringing down the fiscal deficit to 3% of GDP in fiscal2021, should offer comfort on the medium-term fiscal trajectory. That said, fiscalslippage on part of the central government is not without repercussions for monetarypolicy, inflation, and bond markets. In its first monetary policy statement of 2018, theReserve Bank of India (RBI) has already flagged concerns on fiscal slippage and the upsiderisk to inflation.

GDP growth is forecast to bounce back to 7.5% in fiscal 2019, from a low base of 6.5% infiscal 2018. Growth will remain consumption-driven. Investment will improve gradually,aided by bank recapitalization and improved capacity utilization. Export growth stalled infiscal 2018 owing to domestic disruptions is expected to recover, on the back of improvingglobal trade and GDP growth. Consumer Price Index (CPI)-linked inflation is expected topick up to 4.6% average in fiscal 2019, from a forecast of 4% in fiscal 2018, owing to risingconsumption demand, impact of house rent allowance revisions on housing inflation, andhigher global crude oil prices. Upside risks to inflation, however, arise from three factors:(i) fiscal actions (such as higher minimum support price (MSP) and higher pension outgoowing to the Seventh Pay Commission) that will exert higher influence on inflation;(ii) firmer global oil and metal prices that will compel manufacturers to raise prices givenimproving domestic demand conditions; and (iii) higher MSPs for farmers and higherimport duties. Current account deficit (CAD) is expected to expand from 0.7% of GDP infiscal 2017 to 1.7% of GDP in fiscal 2018 and further to 1.9% of GDP in fiscal 2019, owing toimport growth exceeding export growth. Higher CAD will exert pressure on the rupee aswell. Despite higher CAD in the first half of fiscal 2018 on-year, the rupee appreciatedowing to a surge in foreign capital inflows. However, going forward, capital inflows facerisks from tightening of global liquidity and adverse global financial developments.