FM likely to assume nominal GDP at the previous Budget level

The Economic Survey was presented against the backdrop of an unprecedented economic situation due to Covid-19. The key number one looks for in the Survey is the expectation of GDP growth rate for the next fiscal year, which is the foundation for the Budget. The Survey is rich in analysis and comparisons with international data, making it an important policy document, as has been the case in previous years.

In State of Economy Chapter, it discusses ‘lives and livelihood’, ‘demand and supply shocks’ and analyses the economy using high-frequency data. It projects 10-12 per cent real GDP growth for FY22, mainly due to the sharp contraction in FY21. A 7.7 per cent contraction this year will make it the sharpest GDP fall in post-independence history, and FY22’S growth the highest in the same period. Taking the mid value of the 10-12 per cent range, an 11 per cent real GDP growth on the face of it appears to be achievable. Along with 4 per cent GDP deflator growth, nominal GDP growth could increase to 15.4 per cent in FY22 (and 4.2 per cent fall in FY21).

However, with FY20 real GDP growth revised to 4 per cent in first RE for 2019-20 from 4.2 per cent in first AE of national income in 2020-21, absolute GDP amount and growth in FY21 will change, which will have an impact on FY22 GDP numbers. However, that change will be reflected with a lag.

In all likelihood, the Budget is likely to use nominal GDP of ~224.822 trillion, similar to the ~224.894 trillion used in 2020-21 Budget. It also projects 6.5 per cent and 7.0 per cent growth for FY23 and FY24, respectively, and concludes that with 10 per cent growth in FY22, the economy will be at 90.0 per cent of trend level in FY24 (if there was no Covid). However, if growth in FY22 is 12 per cent, the economy will be at 91.5 per cent of trend level in FY24 (if there was no Covid). At the time of global financial crisis, the economy came back to the trend level of GDP after two years.

While the Survey gave an account of fiscal measures undertaken by the government, it didn’t give an estimate of fiscal deficit. It has a good analytical chapter of debt sustainability which concluded that “growth leads to debt sustainability but not necessarily vice-versa. This is because the interest rate on debt paid by the government has been less than growth rate by norm, not by exception”.

Some key suggestions in the Survey are: Sustained and calibrated measures are required to facilitate economic recovery and attain long-term growth trajectory; Industrial and infrastructure development are key for economic growth and macro stability; Impact of government policy measures will be felt in medium to long run and there should be an active fiscal policy to ensure that the economy remains in good shape. All eyes are on the Budget, however, reform is a continuous process and Budget is not the only place for it.