Need expansionary fiscal policy: NCAER

The National Council of Applied Economic Research (NCAER) said it expects the Indian economy to grow 11.5% in the June quarter and in the range of 8.4-10.1% in FY22 over a negative base, calling for an expansionary fiscal policy to put the economy on a sustainable growth path.

“High-frequency indicators show a sharp decline in economic activity during April and May, the peak of the second covid–19 wave. There are some indicators of recovery in June as unlocking proceeds. Export growth is projected to remain buoyant with a recovery in the global economy. This, combined with expansionary macroeconomic policies, could help accelerate growth recovery,” the New Delhi-based think tank said in its latest quarterly review of the economy on Friday, adding that “unfortunately, an inexplicably contractionary fiscal policy” in FY21, sharply reducing the deficit, will delay recovery. “An accommodating expansionary monetary policy has also become challenging because of rising inflationary pressures, but growth recovery is still the priority for RBI.”

To help the economy recover from the unprecedented disruptions for two consecutive years, NCAER said the growth process now needs a strong expansionary macroeconomic policy push. “The required fiscal policy stance in this context is the high expenditure growth. Large deficit financing will be required for a second year. Revenues are likely to fall short of expectations because of the depressed level of economic activity. Unfortunately, instead of the required high expenditure growth, expenditure in the 2021-22 budget was actually reduced to ₹34.8 trillion in 2021-22, down from ₹35.1 trillion in 2020-21, a significant reduction in real terms,” it added.

Even after factoring in the post-budget increase in allocations for larger procurement of covid-19 vaccines an the extension of the additional food subsidy programme till November, planned expenditure in FY22 at 16.3% of GDP is still significantly lower than 17.8% in FY21, NCAER said.

“The fiscal deficit is being reduced sharply from 9.2% of GDP in FY21 to 7.2% in FY22. This premature fiscal compression is quite inexplicable since there is little risk of an elevated level of sovereign debt, which is mostly domestic anyway, becoming unsustainable. This unfortunate premature fiscal compression will further extend the period of disruption before the economy can return to normal growth,” the think tank said.

NCAER said despite the recent spurt in both retail and wholesale inflation, the headline inflation is expected to retreat inside RBI’s band in June and continue to moderate till August but will register a rebound after that.

“The initial moderation will be on account of a moderation in crude oil inflation from 178% in April 2021 to 119% in May 2021. However, the headline inflation may start rising again on account of a few upward risks on inflation. These are (i) rise in agricultural wages with the onset of kharif activities, (ii) a further rise in crude oil inflation (iii) sticky core inflation near the upper level of the band, which is a direct fallout of the pandemic such as supply chain disruptions on the face of demand revival,” it added.