Dedicated to the Covid Warriors, the 561-page-long Economic Survey of India for the year 2020-21 was placed before the Parliament of India on January 29, 2021. The survey, being an analysis on the macroeconomic status of the economy, estimated the Covid-induced economic contraction at 7.7 percent of the GDP during FY 2020-21, with the GDP being projected to grow at 11 percent (closer to the projection of 11.5% by IMF) during FY 2021-22. The survey has envisaged a ‘V’ shaped economic recovery curve, as the inoculation process gathers momentum. Given the increase in capital expenditure in the core infrastructure sectors, the government expects that an infrastructure spending driven recovery would drive the economic development greatly, supported by the private sector.
The Economic Survey points out the impact of the coronavirus pandemic on the economy. As Chief Economic Advisor Subramanian said, “India focused on saving lives and livelihoods by its willingness to take short-term pain for long-term gain at the onset of the Covid-19 pandemic.” A look at the key economic constituents shows that the only sector expected to grow this year, according to the survey, is the agriculture sector which is expected to grow by 3.4 percent, whereas the manufacturing and services sectors witnessed a decline. The agriculture sector, at constant prices, is slated to grow to ₹23.255 lakh crore from ₹23.0379 lakh crore at 2011 prices (Source: Appendix Tables of Economic Survey of India 2020-21). How the agricultural sector is able to outperform the other sectors in terms of growth is worth detailing; may be part of another note. The bank credit (January 1, 2021) stood at a single digit growth rate of 6.7% due to the dire situation during the last few months. In terms of the tax revenues, the gross tax revenue earned by the government during the period April to November 2020 fell by 12.6% to ₹10.26 lakh crore, while disinvestment, which was targeted at ₹2.1 lakh crore, has only been ₹15,220 crore, which is 7.2% of the targeted amount, and has been attributable to the coronavirus pandemic, according to the survey. As a result of the impact, the fiscal deficit has jumped up, and as of January 8, 2021, the union government borrowed a total of ₹10.72 lakh crore, 65% more than what it had borrowed in the corresponding period in the previous financial year. The government consumption is expected to grow by 17%, after contracting by 3.9% during the first half. On the other hand, private consumption is expected to contract by 0.6% in the second half, after having contracted by 18.9% during the first half. The Goods and Services Tax (GST) collections have also increased in the second half of the year, as the monthly GST collections in December 2020 stood at ₹1.15 lakh crore. Exports declined by 5.8%, and imports by 11.3 percent in the second half of FY 2020-21. After a long gap, India has been expected to have a current account surplus of 2 % of GDP in FY 2020-21. Other than a passing Para, the Economic Survey has not discussed the impact analysis of the oil price management and resources augmentation, especially when there is a marked price differential between the international and domestic fuel prices, including the possible inflationary expectations given the high oil prices.
The Covid package is pegged at about 13% of the GDP, which is at ₹27.1 lakh crore. Accordingly, the fiscal deficit to GDP ratio has been pegged at 9.5 percent of GDP for the year 2020-21. This would call for need-based amendments to the Fiscal Responsibility and Budget Management Act, which will find a place in the budget session. The survey states that about 80 crore people have been given free food. Atmanirbhar Bharat Abhiyan 2.0 and 3.0 forming a part of the package, have enhanced capital expenditure and announced measures covering areas like wage subsidies, PLI schemes, National Infrastructure Projects etc. The view has been that the combination of supply and demand side interventions is unique in nature and has supported the economy.
The survey has sought justifications for the economic actions through studies of economists like Hanse and Sargent (2001) regarding the policy priorities during Covid and justifies the actions similar to the Spanish flu epidemic of 1918. Since the view has been that the pandemic spreads faster in higher and densely populated locations, lockdown is justified. Further, the survey has highlighted the government-driven spending contributing to economic growth unlike the US or UK. The borrowing is adequately justified even in the worst-case scenario of the real growth rate of 3.8% or nominal growth rate of 9% every year from FY 23 to FY 29, India’s debt will be sustainable. Towards this, the references of Blanchard (2019) have been used, ‘If the interest paid by the Govt. is lower than the growth rate, then the intertemporal budget constraint facing the government no longer binds.’ Hence the key argument is that the debt can contribute to sustainability through growth. However, one also keeps in view the fact that since interest rates and bond prices have an inverse relationship, in the normal situations of interest rate increase, the bond prices can fall, which can in turn impact the yields, and mark-to-market costs of the institutions underwriting the bonds can suffer; perhaps, the survey has left it for the future. The Covid package of ₹27.1 lakh crore, being 13 percent of the GDP, can be regarded as a true counter-cyclical fiscal policy. However, the net effectiveness on the field can only be judged in terms of the actual beneficiaries, as a lot more depends on effective linking of the beneficiaries to the governmental schemes. The survey as such has not commented upon field-level inputs on the effectiveness in terms of the actual number of beneficiaries, the amount returned on account of access-related issues, etc.
The Survey has dedicated a full chapter (Chapter 3) to India’s sovereign credit rating, which has viewed that the rating has been conservative and does not reflect on the fundamentals. The chapter justified the argument for review by comparing it with a particular country, which was the 5th largest economy and its sovereign rating at that point in time. The fifth largest economies were rated as AAA, and China was rated as A-. The survey argues for a change in the sovereign rating of India from the existing (BBB plus) on the basis of an analysis of zero defaults and other factors. The survey stressed more than adequately on the issue, which can probably support limiting a rating action in the form of a rating downgrade that might take place on account of the enhanced government borrowing and overshooting of the gross fiscal deficit to GDP ratio. Both are negative events from a credit rating point of view. Nonetheless, a rating upgradation can ensure lower interest costs to the sovereign apart from other attractions and hence causes no harm either. Hopefully the chapter can raise debate on the sovereign rating methodology and the need to focus on the weightage assigned to the risk factors forming part of the rating methodology.
The survey attempted to justify the growth/inequality argument as its trickles can support the access to social infrastructure favouring the poor in terms of education, access to health, sanitation, etc. At the local level, the host of issues that the poor face, such as access to quality primary education, sanitation, nutrition, etc., and the process of linkage to the growth argument has not been found. The issue of Covid-19 induced migration, the measures that can limit the miseries of the migratory workers, etc., were indicated by the survey. The survey has argued that the health schemes like Pradhan Mantri Jan Arogya Yojana (PM-JAY), etc., have substantially supported access to quality health care and viewed that an increase in public health care spending to 2.5% of GDP can reduce the out-of-pocket spend from 65% to 35% with non-linear, highly elastic support to the beneficiaries. By referring to the asymmetric information theory of Kenneth J Arrow (1963), the survey argued that the health schemes have significantly supported the people.
The survey has highlighted the disadvantages of overregulation, cited the number of days being taken to closure of a company as an indicator, and called for simple regulation combined with transparent decision-making. Regarding the banking sector, the survey has at length raised the issues arising from the historical regulatory forbearance, citing that ‘emergency medicine’ is not a staple diet, and called for an end to the forbearance that was provided and continued from 2008 to 2011. The survey viewed that the non-performing assets are potentially termed as restructured assets, which can have serious implications on the asset quality with wider economic implications. Expressed concerns over the Asset Quality Review, as it could have perhaps resulted in an underestimation of provisions leading to undercapitalisation. It appears that an independent review of the asset quality and adequately providing provisions at the earliest may be the need of the day, as the banking system must be sound and robust enough to support the investment programmes of the economy. At the same time, since the banking sector as such has been witnessing a large number of frauds and wilful defaults, it would be saddening to divert the public funds for recapitalisation purposes. The survey, however, did not deal with the frequent capitalisation requirements of the banks and their implications. The Survey has called for enhanced R&D spending, especially from the private sector. India needs to improve on its R&D spending in the range of 1.5 to 3 percent of GDP (average of top 10 economies, as India has entered into the 50th place in the top innovative countries). In Chapter 10, the analysis on the access to bare necessities was performed based on the NSSO survey data for the data points 2012 vs 2018, for which 26 variables (sanitation, access to water, education, etc.) show steady improvement across the states. The survey brings out interesting insights in this regard.
To conclude, the Economic Survey has brought out many macroeconomic challenges, as it is supposed to reveal, and attempted to substantiate that growth in general can address the challenges. Looking ahead, from the fiscal front, the immediate issues for the government would be to contain the fiscal deficit to GDP ratio in a time-bound manner, apart from ensuring that the borrowings yield net positive returns. The survey, however, has missed out certain critical elements like malnutrition and hunger. For instance, the recently released National Family Health Survey (NFHS)–5 data reveal a higher rate of undernutrition. In addition, India falls under the serious category as per the 2020 Global Hunger Index. An intertemporal comparison across the states based on multiple parameters, as the survey did, flew over such specifics. The GST-induced formalisation process has been impacting the MSME sector which has serious ramifications on non-farm employment generation. Further, the challenges being posed by the trading block, RCEP (Regional Comprehensive Economic Partnership—though India has opted out in November 2020-) on the MSME sector, which is the second-largest employment contributor, should have given some directions for policy. The time ahead will be looking for inclusive policies and programmes that can address the livelihood issues, especially the migrant labourers, improving the governance framework of the banking system, which has been under stress with two-digit level nonperforming assets and single-digit growth of bank credit. The Reserve Bank of India must ensure that the banking sector does not face systemic risks, and at the same time, they continue to be robust enough to finance investments. While the programmes like Gharib Kalyan Rozgar Yojana have supported ensuring minimum purchasing power and direct transfer schemes are useful, proactive policies that support the poor are the need of the day. To conclude, how effective and broad-based the growth-led economic development approach is something the future would judge. Meanwhile, far more effective measures to support the poor, unemployed, and unorganised segments are the need of the day.
[Disclaimer: Views presented above are those of the author and do not necessarily reflect those of CBPS]
Dr. AV Arunkumar is an economist, a banker, and a former employee of CBPS
