High inflation accentuates the fiscal situation riddled by high debt, causing imbalances
The Government has an uphill task to present an extra-ordinary budget that is low cost, high on growth, and having debt sustainability even as it contends with the third pandemic wave. It is a challenge to achieve Prime Minister Narendra Modi’s avowed GDP target of a $5-trillion economy by 2025, and adjust, if not check, high inflation of 14.2 percent. Now the estimates are for about a $2.6 trillion budget by 2025. The pandemic has certainly reduced the achievements by about $200-300 million. The high inflation accentuates the government’s fiscal situation riddled by high debt and causing imbalances, affecting growth. The IMF observes that central government deficit has risen to 8.6 percent and those of the states to 12.8 percent in 2020-21 mostly due to Covid-19. Bank credit is also subdued. The government has to make a provision for Rs 4.38 trillion on account of delays in 470 projects. With offline mode and other restrictions having a bearing on the economy, that itself is a challenge.It also has to account for growing pressure on the health sector and keep public debt vulnerabilities in check. Mending ways is not easy. It must move out of the many hackneyed high-cost infrastructure investment. The not-so-well-planned highway system has levied additional cost on the rural system as the neighbourhood gets distanced and people are made to pay higher fees and tolls. Certain small and mid-sized cities and townships are being dumped with flyovers and metros affecting their functionality, aesthetics and capability to sustain high-cost infrastructure. Aping the west does not pay.It calls for cut in imports of products that could be made domestically like the rail track cement sleepers to save forex. The Economic Survey 2021-22 does not see high debt as a problem in Indian situation but it certainly raises debt service problems. The ES is of the view that since interest rates are low, the country would be able to sustain it. A sustained rate rise could threaten the RBI’s case for keeping borrowing costs lower for longer to support the economy, given it has a mandate to keep consumer price inflation within its target band of 2 to 6 percent.
The biggest concern is that private final consumption expenditure (PFCE) has still not reached the pre-pandemic levels in the September quarter. The PFCE is the largest component of India’s GDP and its weakness suggests that the recovery is still not broad-based and is being driven by the rich. In the pandemic, the large unorganised labour sector is bearing the brunt of the costs. The Centre for Monitoring Indian economy estimated that over 130 million daily wagers in the urban centres were rendered jobless and homeless. India’s economy has been in distress for most of the last decade - 2011-21. Exports are stuck at around $300 billion for nearly a decade. The 68-day world lockdown has prevented India from bouncing back either on manufacturing or exports. The country is losing market share to smaller rivals such as Bangladesh, whose remarkable growth has hinged on exports. The revenue projections remain moderate. India’s economic advisory council to the prime minister expects the country to grow at an actual of 7.7 to 7.5 percent. The revenue collections may be moderately higher. But the country needing higher doses of cash infusion may not find it easy to manage the finances. The major problem is the industry that contributed 26.5 percent in 2019 is sliding and agriculture with 15.6 percent is sustaining growth. The future trend may remain inflationary and the course towards 2022-23 would remain bumpy but expected to stabilize if the pandemic abates.
(The writer is a senior journalist. The views expressed are personal.)