Economic Survey tries hard to dispel stigma of overusing fiscal policy

Fiscal activism without overstepping into fiscal irresponsibility, seems to be a key policy advice of the Economic Survey. It tries hard to dispel the stigma of overusing fiscal policy, especially during slowdowns, arguing that the resulting growth recovery should allay concerns of debt sustainability. Despite the Survey’s emphatic rebuttal against rating agencies’ outlook for India, it also begrudgingly admits that the ratings as they are currently computed, play an important role in determining portfolio flows. Given the government’s cautious fiscal response to the pandemic so far, it seems unlikely that it will drop the ball on consolidation in the upcoming Budget.

Rather the focus will be to consolidate under the cover of a strong cyclical growth upsurge. The Survey conservatively projects FY22 nominal GDP growth at 15.4 per cent y-o-y for FY22, in line with our expectations of 15 per cent from the Budget. However, it contrasts with our out-of-consensus view on growth, as we expect real GDP growth to average 13.5 per cent y-o-y in FY22 (vs 11 per cent as per the Survey) from -6.7 per cent in FY21 (vs -7.7 per cent), due to a mix of the lagged impact of easy financial conditions, faster pace of normalisation, increased pool of household savings, better global growth prospects, and the ‘vaccine pivot’ later in the year.

The key question is – will the Budget mirror this policy stance? In terms of areas of focus, as we had outlined, the Economic Survey strongly points towards higher allocations for healthcare, infrastructure, incentives for domestic manufacturing and supply-side reforms. On the important question of a fiscal roadmap, despite the Survey’s arguments for a strong fiscal response, and against overthinking the reaction of rating agencies, we believe the government fundamentally sees fiscal policy as an enabler rather than an actual driver of growth. We believe the government will opt for ‘automatic consolidation’ in the FY22 Budget, i.e. allow for a strong cyclical growth upsurge to lead to consolidation rather than expenditure compression. For subsequent years, it is likely to sketch out a fiscal roadmap that balances ambition with credibility, and with an eye on stabilising the public debt to GDP burden and eventually leading it to consolidate back to sustainable levels.

(Dr  Aurodeep Nandi is India Economist, Vice President, Nomura. The views expressed are personal.)