The Union Budget is made in India and is made for India but it is shaped by many global factors. Let’s take a look at five geo-political factors which could shape this year’s budget.
1.Rising Interest Rates
The US Federal Bank, RBI and many other central banks have been hiking their policy rates through 2022 to control inflation. This has led to a narrowing of the gap between US and India’s interest rates. Higher interest rates in the US makes the currency of an emerging market like India weak and strengthens the US dollar. Guess what happens then?
2. Liquidity Reversal
As the dollar strengthens, foreign institutional investors pull money out of markets like India. Why? Since their money will fetch them higher returns when invested in US bonds. As of 16 January of this year, FIIs have been the net sellers in most sessions and have sold more than ₹17,400 crore worth of shares in 2023.
This affects business as well. As FIIs pull out money, liquidity reduces and capital becomes expensive.
3. Re-opening of China
China is completely re-opening its economy again after around three years of Covid-induced lockdown. This is expected to boost consumer demand and trigger a rebound in commodity prices like Crude oil.
4. Russia-Ukraine War
According to the World Economic Forum, the Russia-Ukraine war can have manifold consequences. Both Russia and Ukraine are exporters of Wheat, Corn and many other commodities along with Oil and Gas. Because of the war, many countries, including India, are now facing supply chain disruptions.
5. Global Economic Slowdown
According to the IMF's forecast, higher inflation and interest rates combined with the Russia-Ukraine war may lead to global growth slowing in 2023 from 3.2% to 2.7%. But the IMF has also stated that India is the ‘only bright spot’ as it is one of the few countries where the growth momentum is still going strong.
Budget 2023 will be made against this backdrop of global gloom. Moreover, this is the last full budget before the general elections of 2024. This means that the budget will need to be practical as well as populist.
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