The Economic Survey, tabled in the Parliament today, makes a sombre reading with narrative woven around the ‘once in a century’ pandemic. The Survey projects the economy to shrink from Rs 145.7 lakh crore to Rs 134.4 lakh crore in the current financial year (FY21), a decline of about 7.8% (constant price). However, the bigger concern is that GDP is projected to reach only Rs 149.2 lakh crore in FY22, only 2.4% higher than FY20 level. Here is a look at some of the issues raised in the Survey.
The Economic Survey, published by Department of Economic Affairs within Ministry of Finance is considered as an important policy document. The survey published in two volumes and a statistical appendix summarises the state of the economy, policy initiatives, unique characteristics of the economy, prescription for some of the challenges being faced by the economy and so on. An article in one of the recent surveys talked about a unusual characteristic of India’s demography where over 75% of the last child born in a family are male (which should be nearly 50%).
The Survey this year makes a strong case for increasing government spending and allowing its debt to rise. While this is essential to stimulate the economy reeling under the impact of Covid-19, there is another reason cited by it. As per the Survey, India’s nominal growth rate has been higher than nominal interest rate. This broadly means increase in debt is lower than increase in GDP, thus, bringing down debt/GDP ratio and interest cost/GDP. This has been seen in the recent past with total government debt/GDP declining from about 83% in FY04 to about 70% now. (However, periods before that had seen sharp increase in government debt/GDP from 48% in FY81 to 73% in FY92 and after declining for a few years, again, from 64% in FY97 till FY04). The discussion carries greater relevance in the current context of external shocks caused which entailed direct income support to the vulnerable sections and incentives to productive sectors to stimulate demand. The survey strongly advocates to continue the same in FY22 also as the economy is still not out of the woods yet. Even though there is merit in the logic, it is essential to devise a mechanism to monitor and ensure that the capital expenditure does lead to a productive outcome and aid the economic growth.
The Survey takes on rating agencies in a chapter titled “Does India’s Sovereign Credit Rating reflect its fundamentals. No!”. Indeed, India’s credit rating at the lowest rung of the investment grade (BBB-/Baa3) doesn’t do justice; neither to its willingness nor its ability to pay. These are the two core factors assessed by credit rating agencies to map the probability of default. A quick comparison with Japan shows that Japan enjoys sovereign debt rating of ‘A+’ despite having debt/GDP of close to 240% whereas India’s government debt/GDP is barely 70%, giving credence to Survey’s accusation of bias. India has the same rating as Kazakhstan and Trinidad & Tobago and its rating hasn’t been changed by two of the three rating firms since 2006 and 2007! As per the Survey, India’s forex reserves stood at $584 billion on 15th Jan’ 21 which is greater than India’s total external debt, including private sector’s debt, of $556 bn at the end of Sept’20. Comparing it to a Corporation, India is a negative debt company and therefore, has zero probability of default.
An important issue raised by the survey is the need to change focus from consumer price inflation (CPI) to core inflation. The backdrop for the same is erratic movement in CPI inflation primarily driven by food prices. In FY21 so far (Apr-Dec), CPI inflation averaged 6.6% and stood at 4.6% in Dec’20. In contrast, WPI averaged -0.1% rising to 1.2% in Dec’20. (Even WPI is not the correct gauge for core inflation but closer). The issue carries great urgency because food inflation is a supply side phenomenon and no degree of monetary tightening would bring it down even though it would throttle other segments of the economy. Indeed, India is unique as most of the economies monitor the movement in core inflation and devise their policy response accordingly. An alternative to core inflation is also Producers’ Price Inflation (PPI) which could be even more useful to understand the incipient inflation and tweak monetary policy accordingly. (Read more on this – https://www.indiaeconomyandbusiness.com/inflation-targeting-has-monetary-policy-failed-to-deliver/
The Survey also delves upon issues such as Healthcare, the impact of Ayushman Bharat in tackling Covid-19. It also deliberates on several other issues which have cropped up due to Covid-19 such as impact of regulatory response on banks’ finances etc. More from the survey, in later articles.