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Growth on track, but structural recovery awaits investment push

Nearly all economic indicators point to a quicker-than-expected recovery, with the economy tipped to grow at 10.5-11 per cent in FY22. However, this is a cyclical recovery.

By: ENS Economic Bureau | New Delhi |
February 15, 2021 4:29:20 am
The services sector -- tourism, transport, travel hospitality and entertainment -- have all been badly hit; and it’s critical for the survival of thousands of small enterprises.

Almost all indicators now point to a quicker-than-expected recovery with the economy tipped to grow at 10.5-11 per cent in FY22. Consumer confidence is rising, even as infections fall and the vaccination drive intensifies. The services sector — tourism, transport, travel hospitality and entertainment — have all been badly hit; and it’s critical for the survival of thousands of small enterprises.

Unfortunately, though, this is a cyclical recovery and will not take us too far. A strong structural recovery is some time away and will take root only once there is a big investment push. However, private sector investments are expected to remain weak for at least two more years with a deficit of demand and a surplus of capacity.

While the government’s budgeted capex for the next fiscal is around 26 per cent higher at Rs 5.5 lakh crore, the increase in the total outlay (including PSUs funded via intra- and extra-budgetary resources) is just 4.5 per cent; seen over FY20 too, it is a modest increase of 8.7 per cent. For the key infrastructure sectors, the total public sector expenditure outlay will decline 3 per cent to Rs 8.4 lakh crore next year.

To be sure, the two initiatives — incentivising manufacturing via the PLI schemes and the Development Financial Institution that aims to build a Rs 5-lakh-crore portfolio in three years — are excellent but their impact would be felt two or three years later.

In the meantime, India Ratings says gross fixed capital formation in 2021-22 will be about 25 per cent lower than the trend level.

That would leave the economy over-dependent on consumption.

Private consumption was slowing well before the pandemic and is estimated to increase by about 11-11.5 per cent next year, again below trend levels. —FE

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