The Economic Survey is an important document that lays down the government’s growth outlook for the coming year, the broader strategy to lift growth over the medium-term and the priority between growth and fiscal consolidation.

The survey paints a relatively optimistic growth outlook, in our view, projecting 8-8.5% on-year real GDP growth in FY23, lower than the IMF’s latest forecasts (9%) but above the RBI’s projection (7.8%). This optimism is based on a number of factors, including the gains from supply-side reforms, ongoing vaccinations, higher exports and space for the government to push on capex.

The laundry list of reforms and focus areas is similar to the direction over the past few years: More supply-side reforms and less demand management. These include a push on capex/infrastructure spending, a production-linked incentive scheme, agriculture investments, privatisation, product and process reforms. On these aspects, the survey is more evolutionary than revolutionary.

The survey does not see much conflict between growth and fiscal consolidation. It sees higher tax revenue buoyancy providing the necessary space to ramp-up capital expenditure. Positive multiplier effects from capex and the lagged effects of reforms are all seen supporting a much higher growth, in turn enabling medium-term fiscal consolidation via a virtuous growth cycle.

Overall, the survey suggests that growth is the answer, which will enable both a capex push and medium-term fiscal consolidation.

In our view, the growth path ahead will be a lot trickier. While global growth and exports are strong currently, a shift in the composition of US consumer demand from goods to services, and the lagged effects of a slowing China suggest that global goods demand and exports could face headwinds in FY23.

If so, India may need to significantly increase its export market share, to rely on exports as a sustained growth engine.

Crude oil prices are already hovering closer to $90/bbl, not only due to strong demand and geopolitical risk premium, but also due to the muted supply response from oil producers. For oil-importing countries such as India, this is a negative terms-of-trade shock and will likely weigh on growth.

If higher oil prices are passed on to consumers, then it risks weakening consumer demand – especially at the lower end of the income spectrum – due to the double whammy of lower income and higher inflation. Alternatively, if excise duty on fuel products is cut again, then tax revenue growth will likely be slower next year, in contrast with the tax outperformance in FY22.

Global financial conditions also look choppier due to likely more aggressive Fed rate hikes and quantitative tightening. Volatile market conditions could weigh on investment demand and also make the asset sales agenda tougher to achieve.

Hence, if growth does not come to the rescue, as the survey expects, then the choice between fiscal consolidation and growth will become starker.

The survey talks about how India has tailored its pandemic policy response flexibly to evolving conditions in what it calls an ‘Agile’ framework. If growth does not pick up, as the survey expects, then this ‘Agile’ strategy would mean that fiscal consolidation may have to take a backseat.