This is where the GDP growth of 15.4% in nominal terms represents as it lays down the base for the Budget as the size of the Budget is linked to this number.
In a way this number becomes the pivot for all allocations under expenditure as well as tax revenue.
Economic Survey of India: The Economic Survey is critical as it comes just before the Union Budget and succinctly captures all aspects of the economy. A lot of data is already available till date and hence there may not be anything new to add. However, certain projections made by the Survey are useful as they give us some idea on what the budgetary numbers could look like. This is where the GDP growth of 15.4% in nominal terms represents as it lays down the base for the Budget as the size of the Budget is linked to this number. At Rs 225 lakh crore, it would be similar to that of FY21(B) and hence all proposals on February 1 will be tied here. In a way this number becomes the pivot for all allocations under expenditure as well as tax revenue.
The Survey does point out that the path to recovery in the economy has been quite fast and was more than commensurate with the opening up of the economy. The clue here is really that with enterprise being bogged down for periods ranging from three-six months, the unlocking had multiple effects on demand which has manifested itself quite positively, though being volatile going by the trends in the PMI and IIP numbers. Yet the fact that growth would move into the positive territory by the end of the year is comforting.
For the coming year, the V-shaped recovery of 11% in real GDP is more or less on expected lines and the Survey observes that the recovery will be hastened as the vaccination drive intensifies and leads to more economic activity. The important question is whether this will get translated into the creation of more jobs which is required to enhance income and hence consumption — something which was missing even in the pre-pandemic times.
The Survey does talk of two interesting points which are significant for the coming year. The first is the need to have countercyclical policies to bring about growth and this has been linked to the fact that the government will be the main instrument of growth this year. Whether this will translate into something more aggressive in the Budget needs to be seen.
The report also talks of the deficits for the Centre and states to overshoot the targets this year. This will provide room to persevere with expansionary policies in FY22 as the economy moves along the glide path of consolidation.
Prima facie this makes sense as the private sector will take at least one more year to get back into action and hence the 11% growth in real GDP being spoken of is going to be driven by the government – both consumption and investment.
The second advice given is on having an asset quality review for the banking system once the forbearance period ends. This is very practical as the fear of NPAs ballooning subsequently is quite expected. RBI’s FSR points to this in the stress scenarios outlined.
Quite clearly, RBI would have to get back into this act to ensure that the fault lines are identified so that the banking system can make the necessary adjustments so as to ensure that the 2017-20 story is not replayed.
The guidance provided here is really useful for the coming year.