For the global economy, 2020 was the worst year since 1945 which saw the tragedy of Hiroshima and Nagasaki bombings and the end of the Second World War. For the Indian economy 2020 was the worst since 1965-66 when the economy reeled under the Indo-Pak War and two consecutive droughts. The big difference between now and the earlier crises is that, now, the recovery will be sharper and swifter than during the earlier crises. There are clear signs that as the world leaves the pandemic behind in 2021, economies will rebound smartly, even though there are some uncertainties and areas of concern.
Indian economy is in the midst of a better than expected economic recovery. GDP contraction in FY 21 is likely to be around 7 percent, much lower than the 10 percent contraction feared earlier. Leading indicators like electricity consumption, freight, PMI, and crucial data like GST collections and automobile sales point to a V-shaped recovery. Low-interest rates have turned out to be a major tailwind for sectors like construction and automobiles. The setting is perfect for a ‘budget like never before’ as the FM Nirmala Sitaraman indicated. Will the FM deliver what she has promised?
The FY22 budget should be, ideally, crafted based on the three Rs: Relief, Recovery and Reforms.
Relief
Even though the economy is recovering impressively, there is pain in the MSME sector, which calls for relief. Millions of MSMEs are struggling with poor cash flows and rising debt. Many will be forced to pull down the shutters permanently, seriously impacting jobs and livelihoods. Credit is the lifeblood of business. Therefore, the Emergency Credit Line Guarantee Scheme (ECLGS) for the sector should be continued for one more year. Badly impacted segments like travel and tourism need timely relief. Covid severely impacted urban employment much more than rural employment. We don’t have an urban counterpart to MGNREGS. The best way to create more urban jobs is to give a fillip to construction. The budget can provide more incentives to housing and construction.
Recovery
The most impressive aspect of the ongoing recovery is that it has been achieved with fiscal prudence. The strategy of allowing monetary policy to do the heavy lifting, keeping the fiscal stimulus modest, has turned out to be a brilliant move. Higher fiscal stimulus could have landed the fiscal deficit and public debt in dangerous territory. Fortunately, the fiscal balance is under control. The government is now in a position to go for a one-time big fiscal stimulus focusing on spending on vaccination, infrastructure, and recapitalization of banks. Expenditure on vaccination has the potential to become a major fiscal boost since it will facilitate a fast return to normalcy. The banking sector, particularly the PSU banks, is under stress from excessive NPAs, which can be expected to spike in FY 21. The PSU banks need massive recapitalization, for which the FM will have to find resources.
Reforms
Impressive GDP growth of around 11 percent, assisted by the base effect, is likely in FY22. Nominal GDP growth would be around 16 percent. This could help heal the fiscal situation, but it is important that the recovery sustains. Sustained economic recovery needs reforms, which may not be easy to implement. The farmer agitation is proof of how difficult it is to implement reforms in India. But the government should persist and send out a clear message that it is serious on the reform agenda. Bold announcements on privatizations are the need of the hour. The abundant liquidity and historically low-interest rates in the developed world is manifesting as huge FPI flows into India. Disinvestment will be easily absorbed in this buoyant market driven primarily by liquidity. The FM should seize this tailwind to sail through privatization.
We need more reforms to accelerate investment. Land acquisition continues to be problematic. Electricity charges for manufacturing are high, thanks to the subsidization of power to farmers. This should change.
Taxes should remain stable this year
The government doesn’t have the fiscal space to give many tax sops. This is not the time to tinker with tax rates. The present corporate and personal income tax rates should continue. More importantly, the FM should resist the temptation of imposing the rumored one-time Covid Tax.Taxation of capital gains and dividends also need not be tinkered this year.
Convert the crisis into opportunity
In a recent press meet, the FM said, “we shall be the engine of global growth, for which we need to build capabilities we don’t have yet. India needs to be a part of the global value chain.” Businesses moving away from China will be a major trend, going forward. Countries like Vietnam and Bangladesh are in the forefront of exploiting this opportunity. India should build capabilities to be part of the global supply chain to gain from this megatrend. If we build good infrastructure and improve our capabilities, this crisis will become a major opportunity for India.