| This newsletter and the next will follow a different format than the usual weekly missives I publish. Union Budget 2023 (for the year 2023-24) is positioned almost midway between this Saturday and next, and while analysts and commentators have written about its significance for next year’s national elections, its importance far exceeds that. This budget and the one the next government will present in June/July 2024 will likely define the pace, trajectory, and quality of the Indian economy’s growth over the next decade. I will try and explain this, without resorting to numbers, or forcing you to click other links, in this newsletter and next. Five questions set the context for the second Narendra Modi administration’s last full-fledged budget before the 2024 national elections (next year’s presentation is likely to be a vote on account in the thick of election season). One, is the impact of the pandemic on the economy over (or, at the least, waning)? And as a related question, two, has the pandemic changed the fundamentals of the economy or are we back to 2019? If 2020-21 was an outlier because of the pandemic, and 2021-22, because of 2020-21, then 2022-23 was one because of the collective exhalation of the Indian consuming classes who bought a range of products from clothes to cars, and spent with a vengeance on everything from eating out to travel. By March 31 this year, it will also be the first financial year since 2019-20 that India has not seen any waves of Covid-19. The impact of the pandemic on the economy was over even at the beginning of the current financial year, but what India will have to cope with in the coming financial year is the consequence of policy actions and interventions that helped India negotiate the last two years better than most other countries. These actions meant money has become tight (now), and they have also seen government debt almost double in the past four years. And, in turn, these are the two factors that, in addition to politics, will influence the government’s policies as reflected in the budget. Three, what is the global geopolitical and economic context in the short- to medium-term, and what does that mean for India? This budget is being presented at a time when the global geopolitical outlook is uncertain. No one knows when the Russia-Ukraine war will end. And after three decades, great power rivalry is back in a different form with the Chinese challenge to the US (although China has a bunch of challenges at home). The first means volatility in prices and supply shocks. And the second means choices (India has to pick the right side; the last time, it did not). The global economic outlook isn’t uncertain — there is no doubt that the global economy is slowing down, with many OECD countries facing the threat of recession. That could affect India’s exports, one of the big drivers of the economy in 2021-22, even 2022-23. It is unlikely that the budget will be oblivious to any of this.  Source: ANI Four, is there a fundamental difference between 2019 and 2023 in terms of the government’s approach to the economy? The big difference has to be the focus on manufacturing — partly from the desire to be self-reliant and avoid supply shocks (which could well become more frequent), and partly from the necessity to create jobs. Schemes and policies that seek to boost manufacturing should not be evaluated from a short-term perspective — they have both backward and forward linkages, such as creating a base of suppliers and boosting consumption. To be competitive in manufacturing, a country needs infrastructure, a conducive tax regime, enough skilled workers, and (ideally, but not necessarily) a large and growing local market. Previous budgets of the Narendra Modi government have stressed on some of these and it is very likely that this year’s too will. Five, what do the numbers say? The only number that I believe matters in the coming budget is the nominal growth estimate. Powered by inflation, this soared, and it is evident now that it will exceed estimates in 2022-23. This boosted the government’s tax revenue. With both real growth and inflation slowing in 2023-24, the government’s tax revenue growth is likely to be muted. That could mean more selective expenditure choices. Given the political compulsions of 2024, this is certain to have made the budget drafting process (a draft should be ready by now) challenging. Next week, I will try and explain how the finance minister actually answered these five questions. | 
