Policy response has ensured V-shaped recovery underway
The Survey projects GDP growth of 11% and 6.8% in 2021-22 and 2022-23, in line with IMF’S projection
NEW DELHI: The Indian economy will face a much larger contraction than most major economies in 2020-21 because of the pandemic’s disruption. But a timely policy response, on both the health and economic fronts, has ensured that a V-shaped recovery is already underway in the economy and India is on course to regain its position as the world’s fastest growing large economy for the next two years, according to the Economic Survey presented in parliament on January 29.
The Survey projects a GDP growth of 11% and 6.8% in 2021-22 and 2022-23, in line with the latest projection made by the IMF (which estimated 11.5% in 2021-22 and 6.8% the year after). The ongoing recovery, however, will not lead to a withdrawal of fiscal support by the government and one can expect a big increase in health spending in the budget, which, along with critical supply-side reforms will strengthen the future economic prospects for the economy.
While, the Survey, in keeping with the previous stance of the government, has claimed that the worst is over on the macroeconomic front, it expects growing stress in the financial sector — something that will need proactive regulatory vigilance.
Sharp growth revival going forward
The National Statistical Office (NSO) expects India’s GDP to suffer a contraction of 7.7% in 2020-21. In nominal terms, the contraction will be 4.2%. Nominal GDP is the basic premise of all budgetary calculations, as revenues are a fraction of nominal incomes. The 2020-21 Budget assumed a nominal GDP growth of 12% in the current fiscal year. The next fiscal year will see a sharp recovery on both the nominal and real GDP fronts.
India’s real GDP is expected to grow at 11% in 2021-22, which will take it to ₹149 lakh crore, more than the 2019-20 level of ₹146 lakh crore. Nominal GDP growth in 2021-22 is expected to be 15.4%, the highest since 2010-11. A high nominal growth, along with an increase in tax buoyancy, which is something the Budget can achieve, can lead to a strong revenue growth in the next fiscal year. To be sure, the Survey acknowledges that the fiscal situation has become difficult due to the pandemic. “Keeping in view the revenue shortfall and the demand for higher expenditure in the year, the government is expected to register a fiscal slippage in 2020-21,” the Survey says. “This deviation from the path of fiscal consolidation may however be transient as the fiscal indicators rebound with the recovery in the economy,” it adds.
To be sure, the index of eight core sector industries registered an annual contraction of 1.25% in December 2020, making it the third consecutive month of annual contraction after a 0.6% growth in September, according to data released on January 29.
The pandemic has also had an adverse affect on the government’s disinvestment targets. While the last Budget set a target of ₹2.1 lakh crore in 2020-21, “as on 20th January, 2021, the Government has been able to raise ₹15,220 crore. While many independent economists have criticised the government for a muted fiscal response to counter the pandemic’s disruption, the Survey defends the policy choice by arguing that a fiscal boost during the lockdown would not have helped the economy. It cites a boost in government spending in December quarter to argue that fiscal boost has been synced with removal of restrictions.
Inflation has eased, core inflation numbers matter more
Commenting on inflation, which remained above the upper limit of the Reserve Bank of India’s target range of 6% between April-november 2020 before moderating in December, the Survey has raised points which could have policy significance. While it attributes to sharp spike in food price driven inflation to supply side factors due to the lockdown, the Survey expects inflation to continue to moderate beyond December. However, the Survey makes a case for taking a critical approach to the headline numbers and their role in framing monetary policy.
Not only is food inflation, which has a large share in headline Consumer Price Index (CPI), largely driven by supply side factors, the current inflation basket, which has a base year of 2011-12 does not capture the possible reduction in weight of food items in last decade. To be sure, had the government not scrapped findings of the 2017-18 Consumption Expenditure Survey, CPI basket would have been revised by now. The Survey uses these points to argue that “a greater focus on core inflation is warranted”.
“The Economic Survey 2020-21 has focused on an assessment of how the Covid-19 pandemic is being managed, the trade-offs between the differing compulsions of community health protection and economic recovery, with the protection of lives being the paramount consideration; how to manage the dialectical tensions between ramping up growth and reducing inequality; the need for sensible regulations, as well as the centrality of innovation for fostering growth. The Survey also points to the need for ramping up public spending in healthcare as well as in community surveillance and protection; and the need to revive and fortify investments in infrastructure creation as delineated in the National Infrastructure Pipeline. This focus on accelerating infrastructure creation is expected to yield three-fold benefits: improving people’s ease of living, priming the economy, and absorbing large numbers of the young into non-farm employment. The Economic Survey aims to chart a way out of the pandemic crisis, towards a future of robust growth, as also suggested by the IMF’S World Economic Outlook of January 2021,” Arun M Kumar, chairman and CEO, KPMG in India.