Economic Survey defends Centre’s Covid response

THE SURVEY SAID INDIA WILL SEE A V-SHAPED RECOVERY, GDP GROWTH IS EXPECTED TO JUMP TO 11% IN 2021-22

NEW DELHI: The Economic Survey 2020-21 has presented a firm defence of the government’s response to the health and economic disruption inflicted by the Covid-19 pandemic.

A stringent but timely lockdown prevented 3.7 million cases and 100,000 deaths from Covid-19; a fiscal stimulus during the lockdown would have been a futile exercise comparable to pressing the accelerator when breaks were clamped, and the government has delayed the fiscal boost to align with the roll-out of vaccine, the pre-Budget document tabled by finance minister Nirmala Sitharaman in Parliament on Friday claimed.

It is this policy response which has ensured a V-shaped recovery in the economy, and India’s gross domestic product (GDP) growth is expected to jump to 11% in 2021-22. The ongoing recovery will gain from the structural reforms in factor markets as well as streamlining of regulations in the medium term, the survey has claimed.

The architect of the survey, chief economic adviser (CEA) Krishnamurthy V Subramanian, said India’s policy response was well timed as it first focused necessities such as providing free food to 800 million poor people badly hit by a

hard lockdown and support to the industry through emergency credit and liquidity measures.

He said a policy push to demand at the time of lockdown could be a wasteful exercise. “India realized very well that pushing down on the accelerator of a car while the brakes are already clamped only wastes fuel,” he said.

According to Subramanian, various measures announced in the ₹20-lakh crore stimulus package, such as ₹111 lakh crore National Infrastructure pipeline, would have cascading effect on the economy and create demand.

India is all set to regain its place as the world’s fastest growing economy in 2021-22 and 2022-23, the survey has claimed. This is in line with the International Monetary Fund’s latest World Economic Outlook projections released earlier this month.

A nominal GDP growth of 15.4% in 2021-22 is expected to generate a big boost for tax collections as well. While the survey maintains that the economy is already on a recovery path, it has also made a lot of effort to preserve the policy space for fiscal expansion going forward.

Not only has it hinted towards a deviation from the fiscal consolidation path in the near future, there is also an effort to carve out an intellectual case for fiscal and monetary expansion. This is obvious from the discussion citing both in-house and independent research by on how India’s debt burden is entirely sustainable, why rating agencies are wrong in giving India a lower credit rating and how a rise in government investment in India need not crow out private investment.

The latter is the intellectual premise of keeping fiscal deficit under control. By harping on the need to follow core inflation rather than food inflation – the latter has been the driving force behind the inflationary spike in the recent months – the survey might also be trying to carve out greater space for monetary policy intervention.

The survey presents research to argue that an increase in centre’s health spending from 1% to 2.5% of GDP could bring the share of out of pocket health spending from 65% to 35% in India.

In keeping with what is now an established tradition of the survey going beyond commenting on stylised facts of the economy over the fiscal year, the survey has also harped upon some crucial policy reforms in the regulatory sphere.

It has argued that “the problem of over-regulation and opacity in Indian administrative processes flows from the emphasis on having complete regulations that account for every possible outcome” and the “optimal solution is to have simple regulations combined with transparent decision making process”. It has also underlined the need for rollback of regulatory forbearance to cushion the impact of the pandemic, by describing it as an emergency measure. Read together with the need to initiate a second asset quality review in banks, this suggests growing policy concern over the bad debt crisis in banks, something which was highlighted in the RBI’s latest Financial Stability Report.