Less than a month after the Economic Survey and the budget last year, winter set in, metaphorically speaking. A virus that’s hundreds of times smaller than a grain of salt has raised billions, potentially ending millions of lives worldwide.
The diagnosis and prognosis of the study, as well as the budgetary math that followed, went out of the window as the health crisis rapidly morphed into an economic crisis.
To be sure, the importance of the survey as a source of information has declined over the years because of growing data availability.
The Survey has also been an analytics-based prescriptive document of evolving times, at times using creative data sets and lively narration. This script sticks to the most recent version.
We know, too, that such surveys seldom convince budgets. However, as it was prepared in the light of the most peculiar macroeconomic context, which includes the sharpest contraction India has seen since Independence, the latest one assumes greater significance.
I look at the survey on three parameters: first, the economic outlook behind it for the next fiscal that it paints and assumptions. Second, his thoughts on the overall fiscal stance to encourage recovery and to fix some of warts exacerbated by the pandemic.
Thirdly, it sets out its prescriptions for rising the medium-term potential of the economy as well as the direction of fiscal normalization in that sense.
Strong agricultural efficiency, successful bending of the COVID-19 infection curve, and a pick-up in government expenditure have consistently reduced the downside to the current fiscal and improved the outlook of the next fiscal.
In the midst of the vicissitudes, the survey forecasts real GDP to recover to the next fiscal 11 percent. In line with the International Monetary Fund’s (IMF) updated estimate of real GDP growth at 11.5 percent, this means 15.4 percent nominal GDP growth (270 basis points above its previous forecast in October).
GDP in 2021-22 would only be 2.4% above its fiscal 2019-2020 level and about 10% below where it would have been without the pandemic, even with this optically powerful recovery that, if realized, would make India the fastest-growing large economy.
Although growth is expected to return to the 6.5-7 percent trend after the next fiscal year, the GDP level would still be approximately 10 percent lower than it would have been in 2023-24 without the pandemic. Put another way, there is a continuing loss of 10% of GDP. CRISIL had estimated the loss at 12 percent of GDP last December.
A tale of two halves will be the next fiscal one. A low-base impact will be pronounced in the first half. As the vaccination push plus herd immunity will progressively minimize anxieties regarding contact-based programs, the second half will be stronger and broad-based.
But the prospect of a sub-normal monsoon in 2021 is one danger lurking, not flagged by the survey. Just once in the past 20 years has India seen more than two consecutive years of average monsoon. The past two years have seen strong monsoons, so, statistically speaking, the likelihood of 2021 doing an encore is poor. An eventuality like this will have a bearing on GDP growth.
This can be offset by the better than anticipated performance of non-agricultural sectors, particularly services. With a share of just 16 percent of GDP, agriculture does not have the power to lift the economy out of a recession, but this does not diminish the value of normal agriculture.
It is well above its weight in GDP since it helps more than 40 percent of the population of the world. Net-net, fingers crossed against the front of the monsoon.
The survey correctly recommends balancing, over the medium term, the immediate need to promote growth with fiscal prudence. “Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity,” it says.
That means that the Fiscal Responsibility and Budget Control Act’s convictions could be held in abeyance in the fiscal policy architecture for this year, and normalization will be a gradual process thereafter.
At the beginning of the next political cycle, which is very tough to adhere to, that would also mean fiscal rectitude. But the government of Narendra Modi has so far leaned towards fiscal conservatism, and if medium-term growth remains high, this strategy may be accomplished, as both the survey and the IMF have projected.
The survey has a complete chapter dedicated to debt dynamics and argues that growth in the Indian context contributes to debt sustainability, but not necessarily vice versa. Interestingly, in a comparable sense, the 2017 survey noted, “India’s experience has also highlighted the risk of relying on rapid growth rather than steady debt-reduction primary balance adjustment, a strategy that has failed to firmly put the debt-to-GDP ratio on a downward path.”
Today we will learn what the budget proposes in this respect.
The survey recognizes that the services sector, which accounts for 54% of gross value added, has been hit hard, especially those focused on touch, such as hospitality and tourism, which will take longer to revive. Any concrete guidelines for these programs in the survey may have helped to drive policy.
Also, the urban poor also needs help, particularly those dependent on the service segment. However, as the best way to remove the pandemic wounds, the survey tilts towards development revival.
A cocktail of supply-side reforms, infrastructure creation, productivity-linked incentive (PLI) schemes for manufacturing, and the like would shape the medium-term growth prospects, the survey says.
Although stressing that “India has been the only country to announce a series of structural reforms aimed at expanding supply in the medium to long term and avoiding long-term harm to production capacity,”
It supports the strengthening of economic machinery for more easing of controls, less oversight and more supervision, privatization, and a stronger emphasis on R&D.
Without lubrication from a healthy financial sector, growth cannot be sustained and, for that reason, the survey indicates a withdrawal of forbearance once growth is back on track, followed by a review of asset quality and another round of bank recapitalization.
Soon we will know if the Union Budget of today has taken a cue.