The economy has witnessed a steady recovery to date, but the downside risks continue to weigh on the outlook. The latest surge in infection since the start of the year has increased uncertainties. However, we believe, that the economy will be resilient this time. The government is cautious and is adopting a calibrated response through intermittent regionalised mobility restrictions. That will ensure that this (and any potential future) variant does not derail economic activities significantly. India's growth will likely remain stronger because of the relatively milder impact of this wave on health and the economy, the resilience amongst businesses, and the improving economic fundamentals.
As the economy rolls with the ebb and flow of the pandemic, sustained efforts are needed to keep the growth momentum going and push the pedal towards reforms and their effective implementation. The economy needs both demand creation and investment spending and the government must step in to buttress the improving consumer and business sentiments to spend more.
On the investment side, the government must prudently allocate its limited resources and increase the share of capital expenditure in total spending. Continued spending on physical infrastructure and raising funds for effective execution will be ways to stimulate the multiplier effect on the economy. Infrastructure is one area where India has to scale up significantly to compete with its peers globally. Spending on infrastructure will quickly translate into employment generation for the low-skilled employees and activity among the small and medium enterprises because of the sector’s strong interlinkages with the rest of the economy. This will partially address the underlying demand challenge. While roads, airways, and rail projects will be undertaken, we also expect allocation towards modernisation of public transport, increasing the penetration of the broadband internet infrastructure, and building the green transport ecosystem. Lately, during Covid-19, there has been a rapid adoption of electric vehicles in the logistics sector. The government can accelerate this trend by giving the required thrust (through spending and incentivising private players) in building the ecosystem in the commercial vehicle space and for improving last-mile connectivity.
Again, raising capital at the earliest will be key along with frontloading the process of monetisation pipeline so that resources can be deployed to accelerate infrastructure investments. While monetising assets will continue to be one of the biggest sources of investment, tapping into foreign investors such sovereign wealth funds, pension funds, private equity funds, as well as domestic investors must be explored. In the past, we have emphasized the role of foreign investment in domestic capital formation, providing access to technology, and integration with global supply networks. Also, rationalising the GST rates, simplifying the GST structure by bringing amendments, and ensuring a healthy flow of input tax credit will go a long way in improving taxpayers’ compliance and competitiveness, and thereby, government revenues.
On the demand side, the government must focus on creating jobs and upskilling the workforce as the job requirements with technology adoption change. Reduction in personal income taxes or revising the income tax slabs has been one of the top expectations every year and it continues to be so this year as well, especially for the population below a certain income level. Controlling inflation will be the other aspect that the government must look into so that it does not deplete consumers' purchasing power.
The pandemic has increased the divide between the haves and have nots. The government can step in to increase the supply of and access to public goods, such as medical infrastructure to the poor, education and training to those who have been out of school during the pandemic, and clean water by restoring lakes and cleaning rivers. The government can join hands with the new-age entrepreneurs and millennials who are driven and committed to social and environmental causes. This will aid in improving the quality of growth and help the government to achieve the five commitments to COP26.
The budget will, therefore, focus on building resilience and improving the overall efficiency and implementation of the commitments made earlier.
Rumki Majumdar is an economist with Deloitte India
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