Economic
Highlights
New Delhi, 1 February 2021
ES Positive On Future
GROWTH NOT EASY PATH
By Shivaji Sarkar
India is poised to grow despite the pandemic
panic shock during a critical financial year when all budget projections had
gone awry thanks to total countrywide shutdown of all production, predicts Economic
Survey 2020-21. Agriculture alone is growing at 3.4%.
Importantly, the survey is positive on future
real GDP growth for 2021-22 at 11% despite the economy being in recession
leading to gross domestic product (GDP) contraction of a record (-) 23.9% in
April-June and full contraction of 7.7% during the year. The Survey while
praising the lockdown, notes that the economy is technically in a recession due
to the severe contractions.
This path, with 11%
real GDP growth in FY22 would entail a growth of 2.4% over the absolute level of FY20,
implying that the economy would take two years to reach and go past the
pre-pandemic level. The Survey also estimates the real GDP to grow at
its trend rate of 6.5% in FY23 and 7% in FY24, aided by structural reforms.
(The National Statistics Office revised the
GDP growth rate for 2020-21to 4% from 4.2% earlier mainly due to contraction in
manufacturing and construction on 28 January.)
The growth is to be achieved on such low base
through spending more as there is impulse for “expansionary fiscal policy”, in
short the prescription is to follow the Hindu Charvak philosophy of resorting
to high debt and be spendthrift for “a happier life” and political dividend as
well.
It is an indication that the budget is to
have high fiscal deficit, may be around 7.5% and likely to resort to tough
measures to raise the revenue. It might not be easy on taxes though the room
for actually raising it is limited as the industry is keen on softening of the
tax regime even on personal income-tax to create an environment for increasing
purchasing power.
Chief Economic Adviser K V
Subramanian says economic growth leads to debt sustainability and even if India
were to have real GDP growth rate as low as 3.8% each year from 2022-23 to
2028-29 the country’s debt levels will still come down. Subramanian further
said India has a track record of having adopted expansionary fiscal policy
focused on infrastructure spending.
So as imagined it will be a
five-year budgetary process and not a recovery in two years to undo the
pandemic recession. The Fitch Rating agency earlier had indicated that it would
take five years to get to the pre-pandemic level.
The Survey severely criticizes
Moody’s, S&P as “noisy, opaque and biased”. It adds that the fiscal policy
“must not remain beholden to such noisy/biased measures and should be guided by
considerations of growth and development rather than be restrained by biased
subjective sovereign credits”.
Western agencies maintain a negative
view on deficits and high borrowing and the Survey wants transparent sovereign
methodology, as India’s willingness to pay is unquestionably demonstrated
through zero sovereign default history, Subramanian adds.
A study sponsored by RBI in
mid-2020 by Survey of Professional Forecasters is also not very different from
the sovereign agencies. It avers, “Real GDP is likely to contract by 1.5% in 2020-21 but is
expected to revert to growth terrain next year, when it is likely to
grow by 7.2%”.
The Survey projects that to 11% possibly on better data. But
credit agencies globally keep a tab on different growth parameters and even the
IMF and World Bank do not wish them away. While the Survey extols borrowings,
its expectations are bit speculative. Usually sovereign borrowings lead to
inflation and act as check on growth. Of late, inflation despite some
moderation has been high, including that of food, despite a liberal food dole
to over 80,000 crore people.
Largely the 2021-22 projections are based on “V” shaped recovery
in the second half on a low-base effect of 2020-21; recovery in pent-up demand;
high liquidity and low interest rates driving credit --- a measure that is
hitting the banking sector; supply side reforms through easing of regulations
to increase investment!; spending on manufacturing (provided there is demand
growth); and speculative arena of hopes of rise in discretionary consumption of
vaccine roll-out!
One major aspect of all these aspirations is
the RBI revenue pay-out. The CARE Ratings says that the Central Bank’s
earnings, which build a surplus and contribute to the country’s non-tax revenue
may be dented due to low-yielding US dollar assets, and also due to payment of
interest to banks in reverse revenue repo.
Its earnings were hit by low-interest rates. This
would lead to lower dividend payment by the RBI, which had squeezed itself in
paying over Rs 2 lakh to pay dividend during the last two years. The Survey has
not taken this aspect into its calculations.
While it has laid stress on rising R&D
spending to 3% from 1.5%, noting more than half of it was done by the Government,
it has not taken note of the ground reality that most research in
academia-related institutions are not in proper direction and may be a great
waste due to the lack of a proper methodology.
The Survey has stood by the farm laws and
labour codes saying these are instruments of growth and sustains the view by
citing of 21 reports since 2001. While the views are fine it has overstressed
the benefits of 1991 reforms, often called Manmohanomics.
The nation in the 30th year of
liberalization needs to have a vociferous debate on the “liberalization and new
economy”. It needs to study the linkage of present farm stress and protests and
look for remedies. Its stress on reforms may not be as ideal as the Survey has
projected.
However, it gives a cue to the budget
proposals, which may have large doses of allocations for various supposed
“development and construction” projects as it benefits certain industries.
All in all the Survey is hopeful on the repaying
capacity of high projected borrowings but also indicates many distresses like
credit delinquency, asset quality review of banks, recapitalization and
substantial reform of banks. This could pose a severe squeeze on corporate
borrowers indicating that the optimism on the overall economy may not be as
easy to achieve. The nation is not on an easy path despite a rosy projection.
---- INFA
(Copyright,
India News & Feature Alliance)
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