Economic survey 2020-21: Promise of a counter cyclical fiscal stance

While this will mean material deviation from the FRBM road map, we feel that a decisive and credible stance on near-term fiscal deficit and FRBM targets is the need of the hour

The Economic Survey stood out for its wide coverage, in-depth analysis of current economic issues and key recommendations as regards policy priorities. While this article attempts to discuss a number of such points, it is clearly far from being exhaustive.

Expectations of a strong recovery

The Survey expects a strong recovery with 11 per cent year-on-year (YOY) growth in real GDP in FY22. While investment demand and exports remain anaemic, relatively better rural demand remains a source of comfort. In this context, reviving consumer confidence from the current unprecedented lows needs to be a key focal point for policymakers in the near term, especially given that nearly two-thirds of India’s GDP is contributed by private consumption.

However, it may not be easy amid high uncertainties on multiple fronts and the absence of a strong social security net, even if the intensity of Covid-19 starts easing in the coming months. Expectations remain strong on the government’s continued support for social security programmes including healthcare, rural infrastructure, such as electrification and irrigation, MNREGA, and skill enhancement providing employment and income support for the masses, and thereby reducing future dependence on fiscal support.

A counter-cyclical fiscal stance

A material widening in gross fiscal deficit (GFD) in FY21 remains inevitable. The Budget may peg FY21 GFD to a range of 6.5-7 per cent of GDP, while the final figure may come in higher by, say, about 50 basis points. This will be markedly higher than the government’s initial estimate of 3.5 per cent of GDP a year ago, and 4.6 per cent during FY20. GFD estimate for FY22 is expected to be between 5-5.5 per cent of GDP.

While this will mean material deviation from the FRBM road map for both the years, we feel that a decisive and credible stance on near-term fiscal deficit and FRBM targets is the need of the hour. The Survey clearly underscored the government’s resolve to continue with a much-needed counter-cyclical fiscal stance. One feels that rather than merely looking at the headline deficit numbers, it is critical that the government presents a credible path for revenues and focus on composition and quality of fiscal spending. Also, the likely 15 per cent plus growth in FY22 nominal GDP, as suggested by the Survey, should help against further rise in the debt-GDP ratio. 

In this context, especially as the Survey highlighted about the methodology of sovereign ratings, one must note that the fear of wider fiscal deficit resulting in risks to sovereign rating is only a partial picture, as dent in growth potential can also lead to rating downgrades. Overall, the central government’s spending may be projected at a double-digit growth during FY22. Given the limited fiscal headroom, better targeting of government spending is crucial. One expects the government to prioritise areas with strong and quick multiplier effects (eg, MSMEs, affordable housing, rural economy, infrastructure).

Strong policy resolve

The Survey’s suggestions on process reforms, enabling innovations, focus on the healthcare sector, promoting financial inclusion, and financial literacy are encouraging. The detailed discussions on rising inequality and prospects of larger roles for the private sector are interesting.

Finally, the report is a candid exposition of the grave challenges posed by the “once-in-a-century crisis”. However, it also strongly demonstrates the commitment of policymakers not only in providing immediate support to the pandemic-hit economy, but also not to lose focus on a number of key long-term priorities, which certainly provides confidence despite the current challenging times.

The author is chief economist & head of research at Bandhan Bank. The views expressed are personal