In a recent off-record conversation I had with a senior finance ministry official, he explained how, despite the fact that most nations around the world were veering towards big-bang stimulus packages to haul their economies out of the doldrums in the wake of the Covid-19 pandemic, India stood out and decided to tackle the problem differently. While it clamped a hard lockdown early in the course of the pandemic, it also supported the economy and the vulnerable sections in particular by way of a series of packages which Prime Minister Narendra Modi also referred to, just before the Budget session began on January 29, as “mini Budgets”.

The official said using a “barbell strategy” of considering two extremes—and imposing a hard lockdown in the absence of any available data relating to the pandemic in the initial days—seems to have paid off for the Indian economy. After a disastrous first quarter of FY2021 where it registered a contraction of 23.9%, it bounced back quite handsomely to a much more respectable figure of -7.5% in the second quarter as the restrictions were eased.

Over the past several months, the government has attempted to support the economy by a mix of monetary and fiscal packages, with the Reserve Bank of India also contributing in a big way to ease liquidity concerns. The idea was to give direct financial support to the most vulnerable sections, but also focus on self-reliance and create a stronger structural base for the economy for the longer term. This is where its Atmanirbhar Bharat initiative fits in. Despite criticism from various quarters on its unwillingness to pump in large sums of money through a direct stimulus programme, the government stayed away from this big-bang route.

As finance minister Nirmala Sitharaman gets ready to unveil one of the most important Budgets in India's history, the government’s Economic Survey 2020-21, placed in Parliament on January 29, underscores many of the points the government has made earlier, and projects the picture of an economy on the road to revival and recovery.

“India’s GDP contraction of 23.9% in Q1: FY 2020-21 and 7.5% per cent in Q2: FY 2020-21 quarter reflect the unparalleled effect of the Covid-19 pandemic and the containment measures that were taken to control the pandemic. The contraction was consistent with India’s enforcement of one of the most stringent lockdowns as reflected in the Government Response Stringency Index measured by Oxford University. The fundamentals of the economy remained strong as gradual scaling back of lockdowns, along with the astute support of Atmanirbhar Bharat Mission has placed the economy firmly on the path of recovery,” the Survey, authored by chief economic adviser Krishnamurthy V. Subramanian, says.

A V-shaped recovery

The advance estimates for FY2020-21 released by NSO manifest that the economy is expected to stage a resilient V-shaped recovery in H2:2020-21, the Survey says. As per quarterly estimates released by NSO, the economy has shown a decline of 15.7% by H1: FY 2020-21. A decline of real GDP by 7.7% for the whole FY:2020-21 indicates a modest decline of 0.1% in GDP growth in second half of the year.

“It also indicates a 23.9% growth in H2: FY2020-21 over H1: FY2020-21. Faster normalisation of business activitiesamid gradual lifting of restrictions, higher festive and pent-up demand and policy support is expected to translate into a faster-than-anticipated economic recovery over the second half. This is supported by a strong rebound seen in several high frequency indicators in Q3:FY 2020-21,” it says, citing examples of the rebound.

The roll-out of the Covid-19 vaccines in India is also expected to provide a further boost to this economic momentum. The Survey reckons that after the estimated 7.7% pandemic-driven contraction in 2020-21, India’s real GDP is projected to record a growth of 11% in 2021-22 and nominal GDP by 15.4%. “These conservative estimates reflect upside potential that can manifest due to the continued normalisation in economic activities as the rollout of Covid-19 vaccines gathers traction. This will further be supported by supply-side push from reforms and easing of regulations, push to infrastructural investments, boost to manufacturing sector through the Productivity Linked Incentive Schemes, recovery of pent-up demand for services sector, increase in discretionary consumption subsequent to roll-out of the vaccine and pick-up in credit given adequate liquidity and low interest rates.”

These projections are in line with IMF estimate of real GDP growth of 11.5% in 2021-22 for India and 6.8% in 2022-23, it says. “India is expectedto emerge as the fastest growing economy in the next two years as per IMF.”

The Survey also argues for a sustained effort as part of the Atmanirbhar Bharat Mission, pointing out that the government had recognised the potential ‘hysteresis’ effect of the pandemic on the Indian economy and had undertaken a comprehensive reform programme.

“The structural reforms and the policy push under the Atmanirbhar Bharat Mission are aimed at strengthening the fundamentals of the economy-which should put the economy on a strong growth path once the economy recovers from the pandemic shock. These need to be sustained to bolster the Indian economy to reach its potential growth,” it says.

The policy emphasis, it says, has also been on expansion of public investment which would crowd in private investment. Attempts on deregulation and liberalisation of sectors are aimed at improving the business environment to unlock entrepreneurial energies and increase the risk appetite of private investors. “The private sector needs to partner the government in minimising the disruptive impact of the pandemic on the Indian economy,” it adds.

Atmanirbhar Bharat and the fisc

Importantly, the Survey makes a strong case for the continuation of the Atmanirbhar Bharat package, which it says provided stimulus to the tune of 9% of GDP. Together with RBI’s liquidity measures, the amount works out to ₹28.87 lakh crore, or 15% of GDP.

The Survey, however, is quite clear that given the adverse impact of COVID-19 on economic activity, particularly the decline in individual and corporate incomes, consumption of goods and services and the muted domestic and international trade in the first half of FY 2020-21, tax revenues were likely to fall short of the Budget estimates during 2020-21. Consequently, it says keeping in view the concurrent demand of expenditure pertaining to the stimulus packages announced during the year to mitigate the impact of the pandemic and the anticipated revenue shortfall, “it is expected that the fiscal deficit of the Central Government may overshoot its Budget Estimate for the current fiscal year.”

The concern then, is whether the medium term fiscal policy strategy should focus on growth or fiscal restraint. “Adoption of countercyclical expansionary fiscal policy in times of crisis is expected to boost the growth in GDP both directly, and indirectly through multiplier effects on private consumption expenditure and private investment. Higher GDP growth would thereby facilitate buoyant revenue collection in the medium term, and thereby enable a sustainable fiscal path,” it says, making a case for continuing stimulus measures.

The Survey document is always one which sets the context in which Budgets are presented. However, it need not have any direct bearing on the Budget. But given the fact that the economy seems to be witnessing green shoots, and in sharp contrast to other developed economies, the pandemic appears to be in control now in India, the Budget is expected to unveil measures which will push this momentum forward. The finance minister has promised to unveil a Budget “like never before”. In doing so, the key choice she will have to make is how far she is willing to go with her booster dose, and how much she can deviate from the fiscal deficit target.

The world is witnessing an unprecedented situation. The Indian economy will need the finance minister to pull out all stops to ensure it returns to a sustainable growth path. The Budget could well be the shot in the arm India needs.

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