Less than a month after the Economic Survey and the budget last year, winter set in, metaphorically speaking. A virus, hundreds of times smaller than a grain of salt, upended billions, eventually ending millions of lives across the world.
As the health crisis quickly morphed into an economic crisis, the diagnosis and the prognosis of the Survey, as well as the budgetary math that followed, went out the window. To be sure, over the years, because of increasing availability of data, the value of the Survey as a source of information has diminished. With changing times, the Survey has also transformed into an analytics-based prescriptive document — at times using innovative data sets and lively narration. The latest edition sticks to this script.
We also know that budgets are seldom persuaded by such surveys. But, the latest one assumes greater significance as it has been prepared in the backdrop of a most unusual macroeconomic context, which includes the sharpest contraction India has seen since Independence.
I examine the Survey on three parameters: First, the economic outlook for the coming fiscal that it paints and assumptions behind it. Second, its views on the overall fiscal stance to support recovery and correct some of the warts that the pandemic amplified. Third, its prescriptions for raising the medium-term potential of the economy and also the fiscal normalisation path it suggests in that context.
Consistently good agriculture performance, successful bending of the COVID-19 infection curve and a pick-up in government spending have reduced the downside to the current fiscal and upgraded the next fiscal’s outlook.
Amid the vicissitudes, the Survey projects real GDP to rebound to 11 per cent next fiscal. That implies 15.4 per cent nominal GDP growth — in line with the International Monetary Fund’s (IMF) upgraded forecast of real GDP growth at 11.5 per cent (270 basis points above its previous forecast in October).
Even with this optically strong recovery, which, if realised, will make India the fastest growing large economy, GDP in 2021-22 will only be only 2.4 per cent above its fiscal 2019-20 level and about 10 per cent below where it would have been without the pandemic.
While growth is projected to return to the trend of 6.5-7 per cent after the next fiscal, the level of GDP will still be around 10 per cent lower than what it would have been sans the pandemic even in 2023-24. Put another way, there is a permanent loss of 10 per cent of GDP. Last December, CRISIL had estimated the loss at 12 per cent of GDP.
The next fiscal will be a story of two halves — in the first half, a low-base effect will be pronounced. The second half will be stronger and broad-based as the vaccination drive plus the herd immunity will gradually reduce anxieties about contact-based services.
But one risk that lurks — not flagged by the Survey — is the possibility of a sub-normal monsoon in 2021. Only once in the past 20 years has India seen more than two consecutive years of normal monsoon. The past two years have seen good monsoons, so, statistically speaking, the chances of 2021 doing an encore is low. Such an eventuality will have a bearing on GDP growth.
The offset to this can come from better than expected performance of non-agricultural sectors, particularly services. Agriculture, with only a 16 per cent share in GDP, does not have the heft to lift the economy out of a recession, but that doesn’t diminish the relevance of normal agriculture — it punches way above its weight in GDP because it supports over 40 per cent of the country’s population. Net-net, fingers crossed on the monsoon front.
The Survey rightly recommends balancing the immediate need to support growth with fiscal prudence over the medium run. “Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity,” it says. That means the persuasions of the Fiscal Responsibility and Budget Management Act could be kept in abeyance in the architecture of the fiscal policy for this year, normalisation thereafter would be a gradual process.
That would also imply fiscal rectitude at the onset of the next political cycle, which is pretty tough to adhere to. But the Narendra Modi government has so far tilted towards fiscal conservatism and if medium-term growth remains strong – as both the Survey and the IMF have projected — it might be possible to deliver on this strategy.
The Survey has a full chapter devoted to debt dynamics and argues that growth leads to debt sustainability in the Indian context but not necessarily vice-versa. Interestingly, the 2017 Survey had noted in a similar context, “India’s experience has also highlighted the risk of relying on rapid growth rather than steady primary balance adjustment to reduce debt, a strategy that has failed to place the debt-GDP ratio firmly on a downward path.”
We will learn today what the budget proposes in this regard.
The Survey acknowledges that the services sector, which accounts for 54 per cent of gross value added, has been hit hard, particularly contact-based ones such as hospitality and tourism, which will take longer to revive. Some specific suggestions in the Survey for these services would have helped guide policy. Also, the urban poor, particularly those dependent on the services segment, too, need support. The Survey, however, tilts towards growth revival as the best path to erase the pandemic scars.
The medium-term growth prospects, the Survey argues, will be shaped by a cocktail of supply-side reforms, infrastructure development, Productivity-Linked Incentive (PLI) schemes for manufacturing and such like.
While highlighting that “India was the only country to announce a slew of structural reforms to expand supply in the medium to long term and avoid long-term damage to productive capacities,” it argues for further easing of restrictions, less regulation and more supervision, privatisation and sharper focus on R&D to strengthen the economic machinery.
Growth cannot be sustained without lubrication from a healthy financial sector and, for that, the Survey suggests withdrawal of forbearance once growth is back on track followed by an asset quality review and another round of recapitalisation of banks.
We will know soon whether today’s Union Budget has taken cue.
This article first appeared in the print edition on February 1, 2021 under the title ‘Spending amid a pandemic’. The writer is chief economist, CRISIL
New Delhi: Finance Minister Nirmala Sitharaman and Chief Economic Advisor Krishnamurthy Subramanian during the final touches of Union Budget 2021-22, at Finance Ministry in New Delhi, Sunday, Jan. 31, 2021. (PTI Photo) 
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