Of crucial importance is the need to actually execute reforms and make them work on ground zero. Unfortunately, this is not happening
Unlike the Economic Survey for 2019-20, which was prepared keeping in mind the ambitious target of achieving a $5 trillion economy by 2024-25, this time around, the overarching theme revolves around demonstrating how brilliantly the Government has managed the Coronavirus pandemic. Through lucid elaboration on the details and modeling with facts and figures — using international as well as inter-State comparison within India, Chief Economic Adviser (CEA) Krishnamurthy Subramanian has given ample justification for the “early” and “stringent” lockdown from March and thereafter calibrated lifting of restrictions from June onward. Tacitly, he has also admitted that this led to compression in demand (discretionary spending during this period was almost completely exterminated) on one hand, along with supply side disruption on the other hand.
The precipitous decline in the Gross Domestic Product (GDP) growth by 24 per cent during the first quarter of the current Financial Year (FY) ending June 30, 2020, and continuing deceleration but at a moderate 7.5 per cent during the second quarter ending on September 30, 2020 is the inevitable outcome of the above strategy that was focused predominantly on saving human lives and keeping other health-related damage to the bare minimum.
However, there was sharp rebound during the second half when the decline was expected to be marginal at 0.1 per cent. This has to do primarily with fast normalisation of business activities, a calibrated exit from the lockdown and release of pent up demand (with festive demand acting as the icing on the cake). For the whole year, growth is estimated to be minus 7.7 per cent (against a much sharper decline in double digits forecast earlier by many agencies). For 2021-22, the survey projects the growth to be 11 per cent which is also in sync with the projection by the International Monetary Fund (IMF) at 11.5 per cent.
This much-trumpeted V-shaped recovery (also described as the best among all emerging market economies) has been correlated by the CEA with synchronised policy action — on the demand side by way of reducing interest rate, pumping liquidity, tax cuts and so on — and on the supply side through agricultural and labour reforms. This may be bit of an exaggeration. The recovery has to do overwhelmingly with the exemplary success in implementing measures on containing the virus and avoidance of a second wave of infection.
Pertinently, the survey itself notes: “Contrary to expectations of a faster growth in FY22 helping to shave off the sharp GDP contractions this year, the Indian economy will take at least two more years to return to the growth levels achieved in the pre-pandemic period.” This is also in line with the IMF’s projections, according to which after touching 11.5 per cent in 2021-22, GDP growth will slide to 6.8 per cent during 2022-23.
At the time of taking charge for his second stint in May 2019, Prime Minister Narendra Modi had set the GDP target for 2024-25 at $5 trillion. This by itself was highly unrealistic as it would have required an annual growth of 20 per cent (never seen in the past). Now, with the steep decline of 7.7 per cent during the current FY, even if 11 per cent growth is achieved during 2021-22, the GDP would have merely recuperated to the 2019-20 level or about $2.1 trillion. Starting from here, to reach $5 trillion in just about three years by 2024-25 is next to impossible. No wonder, even the CEA (unlike last year) is only talking of actions in the short term. Accordingly, the Economic Survey for 2020-21 has suggested that “the Government should come up with more fiscal measures for short-term support to the economy and businesses.”
In other words, he wants the Government to go for a more loose fiscal policy notwithstanding the fact that already the fiscal deficit (FD) for the current year is expected to be about 7.5 per cent. This does not include off-Budget liabilities and extra-budgetary resources (EBRs). Once these are included, the deficit will increase further and will be more than double the Budget estimate of 3.5 per cent.
While, talking of measures to boost growth, the official think tank needs to introspect as to why despite a number of fiscal measures (complemented by monetary measures) taken during 2020 — branded by the Centre as several mini-Budgets — both consumption and investment demand continue to remain weak. For instance, look at the steep cut in the corporate tax rate to 15 per cent on new investment granted in September 2019. Yet it failed to spur investment. This has been the position since the third quarter of 2018-19 (that was much before the pandemic) leading to a decline in growth quarter after quarter. Spending a few thousand crore more or leaving more money in the hands of the people (through tax concessions or direct cash transfer to the poor/vulnerable) won’t be of much help in spurring demand or even enthusing entrepreneurs to invest. Of crucial importance is the need to actually execute reforms and make them work on ground zero. Unfortunately, this is not happening. Here are some examples.
Under a stimulus package announced last year, Rs 3,00,000 crore were to be given to micro, small and medium enterprises (MSMEs) or identified stressed sectors under the Emergency Credit Line Guarantee Scheme (ECLGS). Under this scheme, as against a target of eight million MSMEs beneficiaries, only four million got loan aggregating to Rs 1,50,000 crore. Likewise, the Rs 65,000 crore additional amount given for fertiliser subsidy under the last tranche of the stimulus package was meant for clearing pending subsidy dues to fertiliser manufacturers. It is not an additional support to farmers.
As regards the reforms in the field of marketing agricultural products, we have seen the fate of the three Central laws which have the potential of substantially increasing price realisation by the farmers and could have played a vital role in doubling farmers’ income.
As things stand today (right now the Supreme Court has put a hold on their implementation), it is not clear whether these will see the light of the day.
The Modi Government is betting big on investment in infrastructure; it is reiterated in the Economic Survey, too. That will need massive resource mobilisation to the tune of Rs 100 lakh crore over the next five years. A whopping 39 per cent has to come from the Centre and States each and the balance 22 per cent from the private sector. Till date, we don’t have a strategic plan of action on how to do it even as State agencies such as the National Highway Authority of India (NHAI) and so on, continue to be saddled with the responsibility to fund the investment mostly out of borrowings, pushing them into unsustainable debt.
Look at the steep cut in corporate tax that makes India one of the most attractive investment destination: At par with even Singapore. Yet, if one looks at the fine print and in particular, several riders for availing the benefit, this could end up discouraging investors, including foreign companies, to go for it.
To conclude, it may be worth recalling what the CEA had expected the Government to do in the survey for 2019-20. The CEA wanted to expedite reforms in banking, food and fertiliser subsidy, land acquisition, enforcement of contracts, elimination of bureaucratic red tape, removal of bottlenecks in transportation and clearances at the ports. This is a sustainable solution to the problem of low demand and slow growth syndrome. Will Team Modi bite the bullet?
The writer is a New Delhi-based policy analyst. The views expressed are personal.
