What the does Economic Survey say?.
Putting the spotlight on the way forward after the pandemic, the Economic Survey of 2021-22 has analysed aspects such as inflation, global liquidity measures, and rising energy prices to detail the risks for the economy going ahead. It has also taken stock of growing revenues to indicate the availability of fiscal space, should the government see the need to provide additional support.
The Survey has noted that growth in 2022-23 will be supported by widespread vaccine coverage, gains from supply-side reforms and easing of regulations, robust export growth, and the availability of fiscal space to ramp up capital spending.
Fiscal space
The Survey notes that buoyant tax revenues and government policies have created “headroom for taking up additional fiscal policy interventions”. Stressing the need to continue the focus on capital expenditure, it has indicated that the government is on course to achieve the fiscal deficit target of 6.8% of GDP for the current year. Revenue receipts of the Centre during April-November 2021 have gone up by 67.2% (YoY) as against an estimated growth of 9.6% in the 2021-22 Budget Estimates. The estimated tax collections provide the cushion to support growth next year.
The Survey also argues that the banking sector is well placed to support the economy, as it is now “well capitalised and the overhang of Non-Performing Assets seems to have structurally declined”.
Vaccine economics
The Survey says the progress of vaccination should be seen not just as a health response indicator, but also as a buffer against economic disruptions caused by repeated pandemic waves. This is based in part on the assumption that private consumption “is poised to see stronger recovery with rapid coverage in vaccination and faster normalisation of economic activity”, and the importance of vaccination in the re-opening of contact-intensive sectors.
Inflation pressures
The Survey flags inflation as an issue. It has noted in particular that while India’s CPI inflation — 5.2% in 2021-22 (April-December) — is within the targeted tolerance band, WPI inflation has been running in double digits. This is partly due to base effects; however, “India does need to be wary of imported inflation, especially from elevated global energy prices”.
Elevated inflationary pressures could potentially lead to unwinding of liquidity measures by systemically important central banks, including the US Federal Reserve.
Global uncertainty
While the sizeable accretion of foreign exchange reserves — $633.6 billion as of 31 December 2021 — makes India’s external sector resilient for the withdrawal of liquidity measures, the Survey points out that the overall balance of risks for global trade is tilted to the downside.
The biggest downside risk comes from the pandemic, it says, along with longer port delays, higher freight rates, and the shortage of shipping containers and inputs such as semiconductors. Supply-side disruptions, exacerbated by recovery in demand, pose significant risks for global trade.
Energy risks
The report calls for a “diversified mix of sources of energy of which fossil fuels are an important part”, but simultaneously calls for focus on building storage for intermittent electricity generation from solar PV and wind farms to ensure on-demand energy supply.
It asks the government to focus on the pace of the shift from conventional fossil fuel-based sources; and encourage R&D to ensure an effortless switch to renewable sources of energy.
Supply side reforms
The Survey says the post-Covid economy will not merely be a “re-inflation” of the pre-Covid economy and, therefore, simply building it back with demand measures “is not a solution”. It calls for emphasis on developing a supply-side strategy to deal with the long-term unpredictability of the post-Covid world, emanating mainly from factors such as changes in consumer behaviour, technological developments, geopolitics, climate change, and their potentially unpredictable interactions.
Industrial growth
The industrial sector, which suffered due to pandemic disruptions, is likely to record a growth of 11.8% in 2021-22, the Survey says. Although performance slowed during the year, the gradual unlocking of the economy and measures such as the PLI scheme for various sectors, along with policy initiatives such as the emergency credit line guarantee to micro, small, and medium enterprises will help aid the pace of recovery, the Survey noted.
“The pace of this recovery and further growth is likely to continue due to consistent efforts of the government to bring in various structural, fiscal and infrastructural reforms in addition to a slew of measures/schemes like the production linked incentive scheme (PLI) to support industries,” it said.
Public spending
After a slowdown in the first half of the ongoing financial year, capital expenditure by the Centre revived during October-December, the Survey notes. The first-half slowdown was mainly on account of Covid-19-led restrictions. During April-November 2021, capital expenditure grew by 13.5% (YoY), with focus in infrastructure-intensive sectors like roads and highways, railways, and housing and urban affairs. This increase, the Survey says, was particularly substantial given the high YoY growth in capital expenditure registered during the corresponding period of the previous year as well.
Road ahead
Based on the macro-economic stability indicators, the Survey believes that the Indian economy is “well placed” to take on the challenges of 2022-23. The government’s strategy has been to not pre-commit to a “rigid response” while using safety nets for vulnerable sections, and responding iteratively based on Bayesian-updating of information.
The Survey proposes use of the Agile approach to policymaking with 80 high-frequency indicators in an environment of “extreme uncertainty”. The approach, used in project management and technology development, assesses outcomes in short iterations while constantly making incremental adjustments. The suggestion is based on the availability of a “wealth of real-time data” to take feedback-based decisions, the Survey says.
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