This is, by design, a ‘boring’ Economic Survey. Anybody seeking clues to the budget proposals in the Survey 2021-22 will be disappointed. Having gone through several changes in the last two decades, the Survey has reverted to an earlier avatar in which it looks only at the past, anxious not to give a single hint about coming tax or policy changes.
The one clear prediction is of 9.2% GDP growth in 2021-22 and 8-8.5% in 2022-23. This is conservative compared with the IMF estimate of 9% in both years. The Survey could have discussed the reasons for its caution but avoids quantification. It does point to several unknowns such as the future course of Covid and international geopolitical and economic winds.
Will this be an election budget, with populist freebies aplenty to win votes in the coming state elections? The Survey says there is fiscal space aplenty. This implies there will be enough both for raising capex, a long-standing policy thrust, and additional welfare measures. The Survey notes that revenues have been very buoyant this year, and 8-8.5% GDP growth in the coming year implies a continuing revenue boom. The primary deficit in AprilNovember 2021 was barely half the level in pre-Covid 2019-20. There should be enough revenue for election freebies as well as increased capex, which the Economic Survey is keen on.
The Survey shows no hurry at all in returning to the old fiscal deficit target of 3% set before Covid struck. The deficit has been budgeted at 6.8% of GDP for this year and even a significant reduction to 6% of GDP next year would mean total abandonment of earlier benchmarks of fiscal prudence. Governments the world over are spending trillions happily in the belief that high fiscal deficits no longer cause inflation.
But in India this happy theory of spend-and-enjoy is under strain.
The Survey notes that while consumer inflation was 5.6% last December, wholesale price inflation was in double digits for eight months. Imported inflation has been exceptionally high through oil, coal, and gold. This strongly suggests India is in danger of breaking the RBI’s target of 2-6% inflation.
Could this lead to a mid-course correction if inflation keeps rising? Yes, the Survey boasts of a new found “agile” approach that enables policy corrections very quickly. This approach uses high frequency indicators (HFIs) that are very quickly available, sometimes even on a daily basis, whereas conventional indicators come with a lag of months. The HFIs include satellite data, mobility data, GST collections, digital payments and highway toll collections. This is not a new Indian innovation: It is being being replaced with “nowcasts”
Exports have a very bright spot. Merchandise exports have exceeded $30 billion a month for eight consecutive months, and are expected to rise 16.5% this year. More importantly, India’s share of world exports has also risen, representing structural gains apart from simply a bounceback from Covid ravages. However, imports have risen even faster than exports, so the trade deficit is up sharply. But this has been financed comfortably by service exports, remittances, and inflows of foreign finance. However, high import prices plus relatively loose fiscal and monetary policy are stoking inflation, and this will certainly hurt incumbents in the coming elections.
The Survey says that the twin balance sheet problem caused by the 2007 financial crash — bust companies unable to repay debts and hence busting lenders — is more or less over. This implies that new lending can soar. Gross NPAs of banks are down from 7.5% in September 2020 to 6.9% in September 2021, and net NPAs down from 6% to just 2.2%. Simultaneously the capital adequacy ratio of banks is up from 15.84% to 16.54%. This return to normalcy in banks will buttress the financing boom of other avenues such as IPOs totaling Rs 89,066 crore in April-November 2021.
The Survey says supply-side reforms have been a distinguishing feature of India’s reforms. These include deregulation or reduced regulation of various sectors, the ending of retrospective taxation, production-linked incentives for select industries and the sharp rise in infrastructure spending. Processes have been streamlined to reduce delays, and these include new norms for government procurement, simplified liquidation process and cross-border insolvency process. Such minor reforms can cumulatively have a significant effect and do not entail political consequences like the farm reforms. Perhaps this will be the new trend—a growing list of marginal reforms, especially in processes, but no radical reforms that may cost votes.
This article was originally published in The Economic Times on Feb 1, 2022.