Economic Survey 2020-21 endorses continuation of expansionary fiscal stance

The Survey is also bullish about medium-term growth prospects, largely due to the expenditure support and various reforms.

The pre-Budget Economic Survey for 2020-21 has wholeheartedly endorsed the continuation of an expansionary fiscal stance for the next financial year. Tabled in Parliament just three days before Finance Minister Nirmala Sitharaman would present the Union Budget for 2021-22, the Survey has stated that the government may have to continue with an expansionary fiscal stance “in order to sustain the recovery in aggregate demand.”

The Survey, presented in two volumes along with a statistical appendix, is also quite bullish about medium-term growth prospects, largely due to the expenditure support and various reforms introduced during the current year.

But where will the revenues come from and will the continuation of an expansionary fiscal stance lead to an unsustainable rise in the fiscal deficit?

The Survey believes that the expected growth recovery, projected at an 11 per cent real increase in output in 2021-22, would lead to “buoyant revenue collections in the medium term, and thereby enable a sustainable fiscal path.”

What about the long-term strategy on the government’s fiscal consolidation programme? The Survey points to the recommendations of the Fifteenth Finance Commission that would also be revealed on February 1 along with the Union Budget. The Commission’s report, the Survey hopes, would lay down “the roadmap for the long-term fiscal strategy”, not just for the Centre, but also for the states.

The Survey exudes unqualified optimism and confidence in the recovery of the Indian economy. Pointing out that the expected 11 per cent growth in 2021-22 would be the highest since Independence, it claims that the government’s approach to handling the pandemic and emerging out of it with a mix of expenditure support and reforms holds “important lessons for democracies to avoid myopic policy making and demonstrates the significant benefits of focusing on long-term gains.”

On the external front, the Survey once again focuses on the positives of accumulating huge foreign exchange reserves, attracting flows of foreign direct investments and an improving current account balance. On the question of weak exports, the Survey says that the “calibrated easing of lockdown restrictions narrowed contraction in both exports and imports, with imports posting faster recovery leading to progressive expansion of merchandise trade deficit over the quarters of the current year.”

The Survey, however, is silent on the role of import tariffs in promoting a competitive manufacturing sector and exports.

On the whole, there were no surprises in the Survey. It maintained the structure of the Survey that has been followed in the past few years. The first volume focused on several issues of relevance for the economy, while the second volume outlined the performance of the Indian economy in key areas like the fiscal policy, monetary policy, trade, agriculture and industry. The statistical appendix continued to provide the latest data for different segments of the economy.

There were quite a few interesting issues that the first volume dealt with. These  included the government's handling of the Covid pandemic, the question of whether growth can be achieved without losing debt sustainability, the enigma of how India's sovereign credit rating does not reflect its fundamentals, the equation between inequality and growth, healthcare, innovation, process reform and how regulatory forbearance in the financial sector can only be an emergency medicine and not a staple diet.