The ‘state of the Economy’ Chapter in the Economic Survey, 2021-22 commences with the analysis of advance estimates released by National Statistical Office (NSO) placing India’s real GDP growth in 2021-22 at 9.2%. At this growth rate, the Survey observes that the Indian economy will recover past its pre-pandemic output level of 2019-20. While it credits agriculture for lending unwavering support to economic recovery throughout, it attributes the sharp rebound in growth, notably in second quarter of 2021-22 to resurgent manufacturing, reviving construction and release of pent-up demand for contact-intensive services, wherein rapid coverage of vaccination played a critical role. On the demand side, robust merchandise exports, resilient service exports, strengthening investment on the back of strong policy focus on capex and infrastructure spending, and steady pick up in consumption supported the economic recovery.
In an environment of extreme uncertainty, the Survey underscores the effectiveness of the government’s unique policy response in enabling India’s swift economic recovery. The Survey explains India’s economic response to the pandemic in the context of a well-developed intellectual framework, popularly known as ‘Barbell’ strategy in finance. This strategy calibrates quick responses and adjustments to an evolving situation based on a continuous feedback mechanism and Bayesian updating of information on one end and hedges for worst outcomes on the other end. The iterative leg of this “Barbell” strategy is the “Agile” approach as distinguished from the “Waterfall” approach which has been the conventional method for framing policy in India and most of the world. The Waterfall approach entails a detailed, initial assessment of the problem, pre-commits to a rigid path of action followed by implementation.
A key enabler of the feedback-loop based Agile approach in India’s policy response is the availability of real-time data. Over the last two years, the government has been leveraging a host of eighty High Frequency Indicators (HFIs) representing industry, services, global trends, macro-stability indicators and several other activities, from both public and private sources that enabled constant monitoring and iterative adaptations in conditions of unprecedented uncertainty. Such information includes GST collections, e-way bill generations, power consumption, mobility indicators, auto sales, rail freight traffic, digital payments, cargo movements, highway toll collections, etc. as enumerated both in the Survey and Monthly Economic Reports of ministry of finance. These HFIs helped policy makers tailor their responses to an evolving situation rather than rely on pre-defined responses of a Waterfall framework.
The Survey, however, observes that the Agile framework in itself does not resolve the problem of uncertainty and remains vulnerable to unforeseen shocks. This is where hedging leg of the Barbell strategy comes into play to provide a cushion against worst possible outcomes in conditions of massive uncertainty. This explains the uniqueness of India’s Covid-19 economic policy response which combines building safety nets to cushion the impact on vulnerable sections of society/business and a flexible and iterative policy response based on real time information.
The Survey illustrates the use of Agile approach by Indian policymakers when they chose to calibrate fiscal stimulus based on continuous feedback loop provided by HFIs to ensure safety nets and conserve limited resources for when the economy will be ready to absorb. As the economy unlocked and activity gradually revived, the HFIs imparted quick learning to the policy makers on early signals of demand recovery and sectors enduring stress, thereby prompting calibrated fiscal injections, wherever needed. As economic recovery started gaining momentum, Government responded by injecting significant demand stimulus through infrastructure investment that has now gone on to take centre-stage in boosting economic activity. The Survey contrasts India’s response with the Keynesian response of providing large fiscal stimulus upfront that many countries opted for, akin to the Waterfall framework.