Economic Survey reveals flexibility and resilience to combat uncertainty

Govt's focus on supply-side reforms in post-pandemic period, combined with policies aimed at minimising near-term demand shocks and extending safety nets for the vulnerable has been commendable

The Economic Survey for fiscal 2021-22 (FY22) has effectively taken stock of how the Indian economy coped with the second year of the pandemic. The government’s focus on supply-side reforms in the post-pandemic period, combined with policies aimed at minimising near-term demand shocks and extending safety nets for the vulnerable has indeed been commendable.

The Survey highlights that supply-side reforms have been oriented along the lines of achieving flexibility (such as factor market and process reforms), while at the same time improving the resilience of the Indian economy (such as provision of social infrastructure and PLI schemes). The rapid operationalisation and execution of these reforms would be key to boost India’s growth potential in the near-term.

The Survey has corroborated that Government expenditure is back-ended in FY22, with a particular focus on capex that would include both regular spending as well as the large equity infusion into Air India prior to its divestment. Accordingly, we maintain our expectation of a modest fiscal slippage driven by the missed disinvestment target, in spite of the recent announcement regarding the sale of Neelachal Ispat Nigam Limited.

The range of 8-8.5 per cent growth for FY23 assumed by the Survey seems to have built in a cushion for any disruption caused by future waves of Covid. In our view, economic agents are better prepared to deal with future waves of the pandemic, benefitting meaningfully from the insurance offered by the bouquet of social safety nets that the Government has extended since 2020. The continued thrust to government capex portended by the Economic Survey is encouraging, as it holds the potential to trigger a durable growth recovery in FY2023.

We concur that the Indian economy is well placed to face the challenges of FY23, particularly given the recent strengthening of the INR and ample forex reserves. Even as domestic growth fights to attain durability, inflation management will certainly come to the forefront, with supply constraints, recurring logistics nightmares and resurgent risk sentiment boosting commodity prices. The Survey has effectively highlighted the causes of the divergence between the CPI and WPI in FY2022. Looking ahead, this divergence is set to narrow, even as the Survey has sagely forewarned on the need to be wary of imported inflation.

Given the latter, we have doubled our WPI inflation forecast for FY23 to 4 per cent from 2 per cent. Moreover, we believe that further domestic price hikes may be on the anvil, which would contain the uptick in demand and feed into CPI inflation; we expect it to average at least 5 per cent in FY23. Accordingly, we now place nominal GDP growth for the coming year at 13.5 per cent.

Rising commodity prices also have a fiscal cost. Input price inflation sharply augmented the fertilizer subsidy required in FY22, and drove a cut in cesses on fuels. Like other commodities, global crude oil prices have climbed in recent weeks. Will this necessitate another round of excise cuts in 2022? This will guide the eventual fiscal outcome for the coming year.

Following the switch/conversion of GoI securities announced by the RBI and the release of the Economic Survey, G-sec yields have cooled to an extent. We believe this will prove temporary. Given the global cues with the US Federal Reserve having laid the ground for multiple rate hikes, Indian interest rates have nowhere to go but up, a challenge that borrowers have to be prepared for going into FY2023.

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Aditi Nayar is the chief economist at ICRA. Views expressed here are her own.