Economic Survey pegs FY22 GDP growth at 11%

The thread running through the Survey — a sharp economic revival — comes at a time when the Indian economy is expected to contract by 7.7% in 2020-21.

The Economic Survey 2021-22 projected a growth of 11% for the Indian economy, a V-shaped recovery in growth, on the back of the Covid-19 vaccination drive and a recovery in consumption, even as it emphasised the importance of the government continuing to increase its spending and called for an asset quality review across Indian banks.

India will end 2021-22 with a GDP that’s 2.45% higher than its 2019-20 one, effectively recovering from the pandemic-induced economic slump in two years. Employees at shop floor, car Assembly Line at Hyundai motors plant, Hyundai car factory, in Chennai, India (Mint Archives)

The survey, which sets the economic context for the Union Budget — to be presented on Monday — also sought an increase in public health spending to 2.5-3% of GDP (the budget is expected to boost public health spending in the wake of the Covid-19 pandemic, which highlighted gaps in India’s health infrastructure). It also said it expects inflation, a concern right now, to moderate in coming months, creating the context for the central bank to cut rates. The Survey estimated a nominal GDP growth of 15.4% in 2021-22.

The thread running through the Survey — a sharp economic revival — comes at a time when the Indian economy is expected to contract by 7.7% in 2020-21. However, its projection is in keeping with the International Monetary Fund’s recent forecast that said India would be the fastest growing major economy in the world with a growth of 11.5% in 2021-22 and 6.8% in 2022-23. At 11% growth, India will end 2021-22 with a GDP that’s 2.45% higher than its 2019-20 one, effectively recovering from the pandemic-induced economic slump in two years.

“The Economic Survey 2020-21 makes a candid and convincing assessment of the Indian economy based on objective analysis, enriching content and credible policy direction to take the economy forward,” said Chandrajit Banerrjee, director general, CII. Acknowledging that pursuing counter-cyclical fiscal policy boosts growth during economic downturns, the Survey findings are in concurrence with CII’s recommendation on having a higher deficit print, albeit within reasonable limits. “This will result in faster growth and smaller deficits in the future,” he added.

The survey also presented a firm defence of the government’s response to the health and economic disruption inflicted by the pandemic. A stringent but timely lockdown prevented 3.7 million cases and around 100,000 deaths from Covid-19, the survey said. It added that a fiscal stimulus during the lockdown would have been a futile exercise comparable to pressing the accelerator and the brake at the same time, and pointed out that the government has delayed the fiscal boost to coincide with the roll-out of a vaccine. The ongoing recovery will gain from the structural reforms in factor markets as well as streamlining of regulations in the medium term, the survey 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 badly hit by a hard lockdown and lost jobs and support to the industry through emergency credit and liquidity measures.

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

Even as it hinted at deviation from the fiscal consolidation path in the near future, the Survey made a case for fiscal and monetary expansion. It cited both in-house and independent research on how India’s debt burden was entirely sustainable, why rating agencies were wrong in giving India a lower credit rating and how a rise in government investment in India would not necessarily crowd out private investment. 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.

“While it (Survey) argues emphatically for counter-cyclical fiscal policies, comfort on debt sustainability, and unfair treatment by rating agencies, we believe the government is unlikely to drop the ball on fiscal rectitude. We expect the government to announce a fiscal deficit of 6.8% of GDP for FY21, 5.3% of GDP for FY22, and outline a fiscal roadmap that leads to gradual consolidation and stabilisation of public debt levels,” Sonal Varma and Aurodeep Nandi, economists at Nomura Global Market Research, said in a note.

But inherent in the Survey’s numbers are details of a lower devolution to states. While Budget Estimates for 2020-21 had projected an increase in devolution of states’ share in taxes from 6.56% of GDP in 2019-20 (Revised Estimates) to 7.84%, a contraction in GDP and a sharp rise in share of taxes raised through special cess and duty in the current fiscal year could mean a fall in absolute devolition to states, and a lower realisation from disinvestment. The second, a shortfall of around ₹1.9 lakh crore is understandable in a pandemic year, but the former is a matter of concern because the primary response to Covid-19 as well as alleviating distress has to come from the states.

In keeping with what is now an established tradition of the survey engaging in intellectual debates on sometimes radical economic ideas, the Survey also touched upon some crucial policy reforms in the regulatory sphere. It 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 also underlined the need for a 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 RBI’s latest Financial Stability Report.

“The Economic Survey has argued extensively on growth and debt sustainability and how India’s sovereign rating is not appropriate. Since India’s debt is going to be 73.8%, the arguments of the Survey are well appointed. But it cannot be missed that unsustainable debt can put our sovereign rating under pressure and also accessing foreign capital, which is important for infra development, etc, difficult,” said Sanjay Kumar, partner, Deloitte India. “It does point out that there may be enhanced government expenditure in the coming Budget. That is good. Government should, however, be mindful to spend on creating capital assets and not on revenue expenditure. Multipler effect of capex on GDP growth is 2.45, while of the revenue expenditure it is only 0.5. Spends on infra, health, MSME financing, R&D enhancement should not be missed,” he added.