The macro-economic landscape has changed over the last month

The most recent, on 28 February, is the second advance estimate (SAE) of gross domestic product (GDP) for the current year 2022-23, incorporating data for the third quarter. The real growth rate remains 7%, as in the pre-budget first advance estimate (FAE). However, the nominal GDP aggregate in the SAE is lower by ₹1 trillion relative to the FAE. That raises the normalized fiscal deficit (FD) for 2022-23 slightly, to 6.45% of GDP from 6.43%. Putting this together with changed numbers for the prior year, the closing consolidated debt of the Centre and states will also be slightly higher than my budget-based estimate of 86.9% of GDP.

In the forthcoming year 2023-24, the nominal GDP growth rate assumed in the budget applied to the (lower) SAE as the base yields slightly higher fiscal percentages. However, it is best to wait for the end-May GDP estimate based on all four quarters before making any adjustments.

Two other post-budget developments were the repo rate hike on 8 February by 25 basis points to 6.5%, followed by January’s consumer price index (CPI) release on 13 February. The (provisional) January inflation print at 6.52% is high, but contains internal inconsistencies—the reported rate for the cereals subgroup has been spotted to be higher than that calculated from the items comprising the cereals subgroup. Those who corrected this error get a January inflation rate at 6.29%, a full 23 basis points below the reported rate. I have not cross-checked the calculations myself. There are 10 days left for the ministry of statistics and programme implementation to issue the final January inflation print.

The CPI-based inflation rate feeds into the statutory obligations of the Reserve Bank of India (RBI), so the correct calculation of it has become a legal requirement. Quite apart from the current challenge, the methodology for putting together subgroup rates from the constituent items needs to be simpler and more transparent than it presently is. In addition, the latest GDP numbers show that inflation by the GDP deflator was much lower in the past few years than earlier thought. The inflation picture remains muddy.

If the (provisional) January inflation rate is corrected, the revision will affect only headline inflation, which includes food items, but will not affect core inflation, which excludes food and energy on account of their exogenously-driven price volatility. Core inflation provides a better handle on the endogenous inflation momentum in the economy, although of course it too is affected by exogenous prices—the pass through of food and energy prices as also of other commodity inputs. The official inflation target is headline inflation, but the core is referred to in monetary policy statements. However, the core, as officially obtained, excludes just two product groups in the weighting diagram—food and beverages (weight of 45.86%), and fuel and light (weight of 6.84%). The fuel and light group does not include fuel used in conveyance (petrol, diesel, lubricants), which are itemized in the transportation group. Conveyance fuel must be excluded while defining the core.

The weight of the core after excluding all fuels, whether used for lighting or conveyance, reduces from 47.30 % to 44.92%. Core inflation so measured has reigned steadily above 6% since March 2022, except for just one month (May). Core inflation rode above headline inflation in November and December because of the steep fall in fuel inflation in those months year-on-year. In January, core inflation stood at 6.45%.

To summarize, in these uncertain times, it is necessary to keep our gaze on core inflation (properly defined), to decide on whether there is a need for demand suppression—most unfortunate at a time when growth is being given a big fiscal push.

The Union budget provision for rail and road construction amounting to half the total capital expenditure of ₹10 trillion is seen by some commentators as a padded estimate. There is no evidence in recent years to support their contention that actual expenditure will fall short of budget estimates. In the current year 2022-23, expenditure on central sector projects, which contain the key public infrastructure elements, is projected in the revised estimate to exceed the budget estimate by 4%. Actual expenditure in prior years exceeded that budgeted by 5% (2021-22) and 16% (2020-21).

Finally, not a post-budget development so much as a post-budget realization from the expenditure details, is the projected borrowing by Food Corporation of India (FCI) of ₹1.05 trillion from the National Small Savings Fund (NSSF), which directly reduces the budgeted FD to that extent (although such debt is routinely serviced through the budget). Off-budget FCI borrowings were hugely wound down starting 2020-21, so this is a troubling resurgence. In addition, FCI is projected to borrow ₹40,000 crore through suppliers’ credit, but this seems to be more a rollover of the same sum borrowed in the current year. FCI is not a publicly-owned commercial enterprise. It is a departmental executing arm of the Food Security Act. Its borrowings should therefore be directly included in the Union budget.