India: Looking Beyond Budget FY23;Singapore Budget Preview: Pivoting away from crisis management

What has changed?

Global economy: Key commodity prices are up because of political tensions and supply bottlenecks. Central banks, fearing unanchored inflationary expectations, might tighten monetary policy pre-emptively.

Asian economies:

• Chinese policy makers, now more worried about growth prospects, are likely to resort to innovative tools to stimulate the economy. That makes us more optimistic about growth this year but untested new tools could pose risks as well.
• India’s recovery lost steam recently but this is temporary. The central bank is likely to begin policy normalisation in April. Bank Indonesia, however, may hold off policy action. Similarly, we do not see the Philippines central bank normalising monetary policy just yet. There is more data to show Malaysia and Vietnam poised to deliver upside economic outcomes.

India: Looking Beyond Budget FY23

Now that the dust has settled on Budget 2022-23, it is timely to take stock of the broader implications of the budget statement. We outline 5 macro implications from Budget FY23.

• First, the increase in capex is less impressive after accounting for special factors. The assumption that massive public spending will crowd in private investments is questionable. In fact, rising global interest rates and a normalisation in household savings, alongside more government dissaving entail higher yields. Thus, the bond market is poised for indigestion, given the deluge of borrowings at a delicate time when financial conditions are tightening.
• Furthermore, the dearth of details on a credible fiscal consolidation plan raises the risk of
  fiscal dominance by compromising the RBI’s reaction function.
• Last, the reform agenda seems to have hit a wall, with little in the way of further tax reforms, measures to ease India’s inclusion in bond indices, and a fading drive.

Singapore Budget Preview: Pivoting away from crisis management

• The government has clearly signalled the likely revenue measures in the budget to be announced on 18 th February, so there will be few surprises there: The GST rate will be hiked from 7% to 9%, carbon prices will be raised in stages and a very modest form of wealth tax will be announced.
• The government will also offer substantial support measures to help the lower-income groups weather the impact of higher GST rates.
• But, given the policy makers’ determination to bring the budget back to balance, it will be a conservative budget with a slightly contractionary fiscal impulse. Given the strong growth prospects for the economy, that would be appropriate.
• It also appears to us that the government is keen to pivot away from two years of crisis management so as to focus more on structural challenges faced by the economy. More measures to help businesses to scale up and move up the value chain by adopting new technologies are likely as are schemes to to retrofit the city-state’s infrastructure for “greener” growth.

Read more: CAA-Weekly1410222.pdf