Survey addresses the lives vs livelihoods dilemma head-on: Aditi Nayar, Principal Economist, Icra Limited

January 30, 2021 2:00 AM

This would bolster the nascent rebound in growth seen in a wide variety of economic indicators, which portend a welcome exit from the recession in Q4 FY2021.

Aditi Nayar, Principal Economist, Icra LimitedAditi Nayar, Principal Economist, Icra Limited

By Aditi Nayar

The Economic Survey 2020-21 bears the imprint of the Covid-19 pandemic and addresses the lives vs livelihoods dilemma head-on. Its prescription of higher public spending as a balm to heal the Covid-induced scars, suggests that the upcoming Union Budget for FY2022 may target only a modest reduction in the fiscal deficit, after the sharp pandemic-induced widening that is inevitable amidst the historic recession in FY2021.

The Economic Survey highlighted that when uncertainty was elevated at the start of the pandemic,the government chose to conserve fiscal resources and ensure that all essentials were taken care of, instead of pumping up discretionary consumption. With the subsequent pickup in government revenues,spending growth recovered in Q3 FY2021.

The latter appears set to be sustained in the ongoing quarter, in our view. This would bolster the nascent rebound in growth seen in a wide variety of economic indicators, which portend a welcome exit from the recession in Q4 FY2021.

After the real GDP contraction of 7.7% in FY2021 projected by the NSO, the Economic Survey forecasts real and nominal GDP growth for the Indian economy for FY2022 at 11.0% and 15.4%, respectively. Our own projections are somewhat circumspect, at 10.1% and 14.0% respectively, as we foresee a differentiated recovery in consumption across income and age groups in FY2022.

Moreover, private sector capacity expansion announcements are expected to make a cautious comeback in 2021. However, these may turn out to be restricted to some specific sectors in the near term, which witness a swifter rebound to relatively healthier capacity utilisation levels.

In our assessment, achieving the rate of GDP expansion projected in the Economic Survey will necessarily require a considerable push from central,as well as state government spending in FY2022. The Fifteenth Finance Commission’s recommendations on fiscal transfers, as well as the anchor to be adopted for the state governments’ fiscal deficit, will be crucial to permit the latter.

The Survey averred that in India, growth leads to debt sustainability, not vice-versa. It also remarked that debt-financed public spending is more cost-effective to employ during recessions, than during economic booms. We concur that the fiscal multiplier of augmented capex is likely to be sizeable in the current situation, and expect the Survey’s comments to translate into a renewed thrust on capital spending in the upcoming Union Budget.

Based on the comments made in the Economic Survey, we expect the Union Budget for FY2022 to incorporate a growth in gross tax revenues of 15-16%. This, in conjunction with a fairly stiff target for disinvestment proceeds, would allow the government to portray moderate fiscal correction, despite the anticipated expansion in spending. The ensuing higher GDP growth, would aid in the return to a sustainable fiscal trajectory over the medium term.

What will this refreshed fiscal glide path look like? The rolling targets for the government of India’s (GoI’s) fiscal deficit for FY2023 and FY2024, and the ultimate anchor for the medium term are eagerly awaited.

In our view, it may be an opportune time to revisit the prevailing, righteously elusive fiscal deficit norm of 3% of GDP. This target may be neither achievable in a sustained manner and nor appropriate, in the Indian context, as the only way to get there may be to continuously defer much-needed capex.

The author is Principal Economist, Icra Limited

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