Eco Survey sees V-shaped recovery, but stimulus key

As economic activity normalizes, covid-19 vaccination gathers pace, and a host of policy steps take effect, the Indian economy will expand 11% in the year starting 1 April after shrinking 7.7% this fiscal, the Economic Survey said.

The estimate, which the survey’s authors called “conservative”, is close to the 11.5% growth predicted by the International Monetary Fund (IMF) for India last week.

The survey, penned by chief economic adviser Krishnamurthy Subramanian and his team, and tabled in Parliament by finance minister Nirmala Sitharaman on Friday, said that in FY22, India’s real gross domestic product (GDP) in absolute terms would be 2.4% above what it was in FY20. That is, real GDP would contract in the current fiscal to ₹134 trillion from ₹146 trillion last fiscal but will end FY22 at ₹149 trillion, making up for the loss with a small margin. The economy would thus take two years to cross the pre-pandemic level.

The survey also made a strong case for the government to offer further fiscal stimulus to avoid risking the temporary weakness in demand resulting in lower potential growth.

The survey, a critique of the management of the economy, said that in a country like India, which has a large workforce employed in the informal sector, counter-cyclical fiscal policy is of paramount importance. It also assured that an active fiscal policy that provides an impetus to growth will lead to lower, not higher, debt-to-GDP ratios.

The survey also encouraged the government to take fiscal measures without fearing “noisy/biased” sovereign credit rating actions by rating agencies. India’s fiscal policy should reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear, the survey said. It invoked the example of Indian kings who built palaces during times of famine and drought as it had a beneficial effect on job creation.

The idea of such spending during hard times was “to provide employment and to improve the economic fortunes of the private sector”, it said.

Official data showed on Friday that the Centre’s fiscal deficit remained 45% above target at ₹11.58 trillion in the April-December period of this fiscal.

Earlier in the day, Prime Minister Narendra Modi said the FY22 budget will be seen as part of a string of economic packages, or mini-budgets, announced last year.

After an 8.2% expansion in FY17, India’s economy started cooling off, with the rate of growth slowing to the now-revised 4% in FY20. The current fiscal is expected to end with a 7.7% contraction. The survey cited the IMF to say India will emerge as the fastest growing economy in the next two years.

It also projected that in nominal terms, India’s GDP would expand by 15.4% in FY22, suggesting a retail inflation of 4.4%.

“Based on the comments made in the Economic Survey, we expect Budget FY22 to incorporate a growth in gross tax revenues of 15-16%, which in conjunction with a stiff target for disinvestment proceeds, would allow the government to project a considerable expansion in spending, especially on capex,” said Aditi Nayar, principal economist at ratings agency ICRA Ltd.

The V-shaped recovery the survey expects relies on a mega vaccination drive and hopes of a robust recovery in the services sector and growth in consumption and investment. “The fundamentals of the economy remain strong as gradual scaling-back of lockdowns along with the astute support of Atmanirbhar Bharat Mission have placed the economy firmly on the path of revival,” the statement said.