The Indian economy suffered one of the worst contractions in 2020. The Economic Survey 2021 projects the economy to contract by 7.7 percent in FY2021. The loss of jobs and incomes has been huge and the unorganized sector, particularly the MSMEs, suffered the most. Retail trade, travel and tourism and hospitality took the biggest hits on employment. According to CMIE, retail trade suffered the largest loss of jobs of 10 million followed by travel and tourism with a loss of 5.5 million jobs. However, by December, job losses have come down drastically.
The relief and stimulus provided by the Government led to sharp increase in public expenditure, but lockdown and loss of economic activity resulted in sharp decline in revenue collections. This scissors effect has caused a sharp surge in fiscal deficit to 9.5 percent of the GDP for FY2021. The combined fiscal deficit of the Centre and States put together is likely to be more than 14.5 percent in FY 2021. The deficit, though justifiable in these abnormal times, can create serious problems unless bold steps are taken to bring it down.
Leading indicators suggest sharp economic rebound
The positive news is that the economy is recovering strongly. The RBI and the Government project the growth for FY 2022 to be 10.5 and 11 percent respectively. The IMF, which is more optimistic about India’s growth recovery, pegs the growth rate at 11. 5 percent. Indian economy is likely to be the fastest growing large economy in the world in 2021. Leading indicators like e-way bills, GST collections, electricity consumption and sales of automobiles, cement and steel point to smart recovery in the economy. GST collections at Rs 1.2 lakh crores in January is an all-time high. If the recovery sustains, the Budget targets for GDP growth and revenue collections can be surpassed.
Economic recovery: Is it K or V?
Economists have been debating whether the ongoing recovery is a V-shaped or K-shaped recovery. A closer and detailed analysis of the economy indicates a K-shaped recovery, where parts of the economy are rising while other parts are going down. It’s a fact that the organized sector of the economy is doing well. Some segments like pharmaceuticals have gained from the pandemic with rising sales and profits. IT was not impacted at all since the industry quickly adapted to WFH (Work From Home). Also, accelerated digitalization facilitated the growth of the IT industry. Similarly, telecom did well, gaining from the explosive growth in data consumption triggered from WFH. But the unorganized sector was ravaged by the lockdown. Millions of jobs were lost. Agriculture is doing well and the projections are that food grain output will surpass 300 million tons this year.
Low interest rate is a strong tailwind
Economic growth started gaining momentum from October onwards. The sharp cuts in interest rates – Repo rate was cut by 115 bp – and easy availability of credit brought down market interest rates sharply. Now, housing loans are available at 6.8 percent. The EMIs on housing loans are down by more than 25 percent. Automobile loans also have turned cheap. This low interest rate regime has turned out to be a major tailwind for the housing and auto sectors. Since these two segments have high ‘employment multiplier’ it will help in quick economic recovery.
Bold and reformist budget
A Covid-struck economy staging a V-shaped recovery needed a bold and imaginative Budget to keep the recovery going. FM Nirmala Sitaraman delivered precisely such a Budget and even went beyond expectations by initiating privatization in right earnest. The proposal to privatize two nationalized banks and one general insurance company is a clear message that privatization is on top of the Government’s agenda. Raising the FDI limit in insurance from 49 percent to 74 percent is a step in the right direction. The proposed Asset Reconstruction and Management Company, the so-called Bad Bank, will help clean up the banks’ balance sheets.
Six pillars to ensure sustainable growth with social justice
The budget crafted on six pillars — health and wellbeing, infrastructure, inclusive development, human capital, innovation and R&D, and maximum governance — is a visionary document for sustainable growth with social justice. It learns from the global experience that growth is delivered by the animal spirits of entrepreneurs in a vibrant market economy and that growth is the best anti-poverty program. The strategy of public action for inclusive growth continues.
Deficit is excessive and can be inflationary
Even though absence of new tax proposals is a big relief, there is a concern on huge reliance on financing the expenditure through borrowing. The fiscal deficit at 9.5 percent of GDP for FY2021 has come worse than expected and the deficit target for FY 22 at 6.8 percent is on the higher side. But, it is to be appreciated that this is a transparent fiscal deficit that includes the off-budget borrowings of entities like the FCI. Also, it is a relief that Rs 5.54 lakh crores of the proposed expenditure is capital expenditure.
The steady decline in Covid infections in India and the ambitious vaccination drive are positive developments. Government’s bold moves in the budget, the monetary stimulus provided by the RBI and the improving business confidence augur well for economic growth, going forward. However, new strains of the virus, rising crude and rising bond yields are areas of concern.