Before the release of Union Budget 2021, the Economic Survey was tabled fueling optimism and setting an outline on the focus of the budget. The pandemic induced lockdown has undoubtedly punctured the economy that was aspiring to achieve five trillion dollars. After the mega vaccination drive, the Gross Domestic Product (GDP) is estimated to shrink by 7.7 per cent in FY 20-21. The report expects a V-shaped recovery, the first half will witness a sharp decline of 15.7 percent and a marginal fall of 0.1 per cent in the second half.
The survey summarized by Chief Economic Advisor, Dr. Krishnamurthy Subramanian calls for a strong counter-cyclical fiscal policy to return to pre-pandemic levels of growth. The survey points out that the state’s policy action matured for a “once-in-a-century” crisis by prioritizing long term reforms.
The agriculture sector with a growth of 3.4 per cent in FY21 and a government consumption cushioned the revival during the year 2020. Despite a negative growth rate of 23.9 per cent in Q1, the economic survey observes a strong recovery with indicators like E-way bills, rail freight, GST collection, and power consumption has improved to pre-pandemic levels.
India had announced a slew of measures to combat the failing economy, high inflation, and rising unemployment. There was a conspicuous problem in both demand and supply-side measures were to be focused on boosting domestic demand and addressing supply-side bottlenecks. The last Union budget in 2020 was an ambitious roadmap with an estimation of INR 30 lakh crore, however, the pandemic has garnered attention as the government announced a fiscal stimulus package of INR 20 lakh crore.
Indian economy throughout the lockdown exposed two important structural problems that would help us evaluate the upcoming policy strategy. One, from the demand side, the consumption was weak as incomes started falling. Also, the migrant labour crisis explicated poor labour rights protection in the informal sector. Second, even after easing the lockdown, supply-side constraints were prevalent as the micro, small & medium scale enterprises (MSMEs) suffered extensively during the lockdown. Out of 63 million MSMEs, around 99.4 per cent are micro-enterprises, highly concentrated in rural areas. Just like the lack of data on migrant labourers, there is no data available on the closure of MSMEs during the lockdown. Make in India rebranded as the atmanirbharat package was sought to act as a fiscal stimulus package. However, against the claim of spending 10 per cent of the GDP, the cash outgo was only 1.7-2 per cent of GDP under the package.
The highlights of the Economic Survey states India was the only country to take structural reforms for the medium and long term with a calibrated demand-side push. The National Infrastrastructure Pipeline project worth INR 3.6 lakh crore is expected to accelerate public investment and therefore have a multiplier effect on the economy. However, the translation of government spending into employment and subsequently into increased income and demand will take time. The success of government investment highly depends on the success of structural reforms in the labour market and the financial sector.
Economic slowdown ruptured the formal salaried sector but increased the flex staffing- there are roughly 3 million gig employees and the figure will only keep growing. The survey noted that during the pandemic, the gig economy was recognized and digital employers started hiring temporary staff. Although the recently passed labour code bill calls for a social security plan for the gig employees, a substantial infusion of money from the government budget is the only way to protect the workers of the gig economy.
The revival in the second half of the FY20-21 was backed by government consumption and net exports. While the consumption by the government is expected to grow at a rate of 17 per cent on a y-o-y basis, both exports and imports are expected to decline by 5 per cent and 11.3 per cent respectively. In the course of the pandemic, industry and services sectors were severely affected and are expected to fall by 9.6 per cent and 8.8 per cent.
A strong argument is made in favour of growth leading to debt sustainability- with burgeoning national debt to GDP ratio at nearly 85 per cent- countercyclical fiscal measures are prescribed. The need to cap the debt has been diluted, reflecting on the Modern Monetary Theory- conceptually encourages higher fiscal spending at the time of economic downturn. The focus for India has been shifted back to growth and assumes lower debt is an inevitable outcome of growth- a point to assess with scepticism. However, economic growth as an objective cannot be dismissed as the battle against the pandemic is still not over.
The Economic Survey emphasizes the improvement in the Bare Necessity Index (BNI) and the interstate equity in access to basic needs. The composite index constitutes water, housing, sanitation, micro-environment, and other facilities. In the recent Oxfam report titled ‘The Inequality Virus’, the billionaires’ income increased 35 per cent during the lockdown while the bottom 10 per cent of the population lost one-fourth of their income. Although the growing inequality is a problem of a developing economy, the survey suggests a more growth-oriented policy over the redistribution of income.
Overall, the economic survey presents an optimistic picture of recovery suggesting a fiscal policy measure for the upcoming quarter. Despite being credited for the reforms undertaken during the past few months, the V-shaped recovery is possible only if the macro fundamentals are favourable. Experts including IMF Chief economist Gita Gopinath believe cutting down wasteful expenditure and lifting fiscal boost can assure a strong comeback. Further, a look at expenditure does not give a promising impact on the reform packages. The expenditure under the capital account is only 13 per cent of the total expenditure, indicating that the expenditure is mostly under the revenue account. The survey has painted a rosy picture that India aspires to achieve but the path remains unclear.