On January 29, India’s finance minister Nirmala Sitharaman presented the most anticipated, awaited economic survey of 2020-21. During such arduous times, the economic insight and budget command much undivided attention from everyone.
The survey estimates nominal GDP growth to stand at 15.4% and the real GDP growth at 11% in 2021-22. Finance minister moreover appreciated the IMF economic predictions of India to stand at 11.5% and the only economy to register such a growth. According to the latest survey, this growth would be the strongest growth since India was liberalized in 1991.
The survey also stated that with a 23.9% contraction in the first quarter coupled with the contraction of 7.5% in the 2nd quarter, India was technically in a recession as it had witnessed contraction for two consecutive quarters.
The consumer price index-based inflation was kept at 6.6% in 2020-21. The inflation is mainly projected to be mainly due to food inflation which increased from 6.7% in 2019-20 to 9.1% in 2020-21. The Economic Survey Says Sole Focus on Combined CPI May Not Be Appropriate as Food inflation was driven primarily by supply-side factors. It is widely acclaimed that Several components of food inflation are transitory with wide variations. Changes in consumption patterns is not reflected in the current index.
On the current account status, the first half of the FY 2020-21 saw an account surplus of 3.1% of GDP. The survey positively predicts the current account surplus to remain at least 2% of GDP by the end of 2020-21. If this is achieved, this will emphatically break the 17-year trend of account deficit. This also seems a possibility as during the pandemic, the trade deficit of India declined due to low demand. The demand for exports in India declined and this is what presents itself as the most probable reason for the same.
In the area of fiscal deficit, as of November 2020, the fiscal deficit stood at 135.1% of budget estimates. This shows that due to COVID 19 pandemic, the country was fiscally strained.
The Index of Industrial Production (IIP) growth declined by 15.5% between April and November. The IIP recorded a growth of 0.3% during the same time in 2019. IIP is the measure of industrial performance giving a weightage of 78% to manufacturing, 14% to mining and 8% to electricity.
In 2020-21, the service sector is expected to contract by a hefty 8.8%. By the same time in 2019, the service sector had recorded a growth of 5.5%. The only sub sector that recorded a positive growth of 3.6% was the software sector.
While the pandemic proved quite ominous for the trade worldwide, the Indian service export sector proved quite resilient. The net services export receipts in first half of 2020-21 were 3% higher than the receipts in the first half of 2019-20.
The survey also showed that the health insurance services were expanded under the Ayushman Bharat Pradhan Mantri Yojana. The proportion of health insured households increased by a hefty 54% from 2015 to 2019-20. The survey further elaborated on better access to bare necessities which lead to the overall general improvement in the health indicators.
India has the highest out of pocket health expenditure. To counter this, the survey suggests the public spending to be increased from 1% of the GDP to 2.5-3% of the GDP, which is estimated to reduce the out-of-pocket expenditure from 65% to 30%.
During the economic crisis, adoption of regulatory forbearance could help ease the bad loan crisis of India. Regulatory Forbearance includes measures that allows a bank to restructure loans instead of changing the classification. The survey emphatically suggests the withdrawal of such measures in timely measure. This should be done while reviewing the quality of bank assets and capitalization to ensure growth in lending.
India recently ranked 48 in the Global Innovation Index which makes it the first in the central the southern Asian countries and gives it an esteemed ranking amongst the lower middle-income economies to do so. But India’s investment in Research and Development department is the lowest among the larger economies, standing at meagre 0.7% of GDP. China’s expenditure for the same stands at over 2% and at 2.5% in USA
Currently, the government accounts for the highest share of contribution of 56% to the total GERD. This is the higher than the contribution of the government sector in the top economies (20%). Similarly, the business contribution to the GERD is lower than the business contribution in the top economies.
The allocated capital budget for defense has always been fully utilized since 2016-17, breaking the previous records of surrender and underutilization of funds. “the trend of underutilization of defense budget has also been reversed from the financial year 2016-17”, the survey stated.
In march 2020, Covid-19 was declared as a pandemic by the WHO. This led to the imposition of stringent lockdown in India. The survey noted that early use of intense lockdown led to reducing of the magnitude of the peak. This led to a low mortality rate and a sharp V recovery that India faces right now.
Chief Economic Adviser Mr. KV Subramanian has stated that the government must use its fiscal policy to support growth till pre-COVID-19 levels of growths are achieved. Subramanian said in his press conference on the Economic Survey 2021 that Counter-cyclical fiscal policy (where the contraction in the economy is met by the counter government expansionary policies) must become an important point of emphasis for the government, especially at times like these.
Subramanian also emphasized on the infrastructure spending which will prove essential in producing huge job opportunities and will have powerful multiplier effects for the economy.