To call the economic recovery V-shaped could be misleading as it would take at least 2 more years after FY22 to go back to the high growth path. Therefore, this optimism should be laced with some caution
The Economic Survey for 2020-21 goes beyond being a documentation of numbers and has thrown open for discussion several issues which are interesting. At some places, the Survey may be blowing hot and cold which is understandable as there are clearly no clear answers on several issues. Let us look at some of them.
First is the overall approach of the government to the pandemic. It has been argued that having a lockdown has been the best solution as lives mattered more and there has been data derived from models shown to prove the same. It may however be argued that the lockdown has pushed the economy back by a couple of years and it is still hypothetical about what the cost in terms of spread of infection could have been as there is view that the control in India was more due to herd immunity as social distancing has not been observed for most of the time notwithstanding the stringent curfews being imposed.
Second, the Report has justified a rather novel approach which India has taken to addressing the pandemic in terms of having reforms on the supply side. The demand side was less evident in the entire package which is one reason why consumption has taken a backseat. While most of the reforms were on the supply side which have targeted the medium to long term, it could be counter-argued that our approach was not like what the west did where money as transferred to the people to enable them to get over the crisis. A more proactive demand led policy could have alleviated GDP de-growth which could have been closer to nil.
Third, the Survey talks well of the banking system which is factually right as NPAs have come down and the CRAR has improved. But as the RBI had pointed out in the Financial Stability Report, a lot of this is due to the forbearance which has been offered and the picture will look different once it is withdrawn as the stress tests show. The Survey is also happy with the interest rate transmission this year, which is a good sign as there has been a perennial difference of opinion with the RBI on this issue. Whether this will mean the end of rate cuts will have to be seen.
Fourth, the Survey however admits that forbearance has been a part of the pandemic strategy and hence suggests that logically there is need to carry out an asset quality review once it comes to an end so as to ensure that the banking system is back on track. This is progressive and makes sense as it is prudent to grasp the problem before it gets magnified. We can hence hope for the RBI to get into the act sometime during the year to ensure that the problem is addressed. We can hence some unpleasant news on the NPA side once the AQR-2 starts.
Fifth, the Report suggests strong counter-cyclical policies and this will be keenly watched on 1 February. The Budget has to walk on the tight rope trying to balance the fiscal deficit target with the revenue and borrowing that can be had during the year. While a fiscal expansionary policy is appropriate, it was not used in FY21 when it was needed the most. Therefore, expecting the government to do so this time may be bordering on optimism. Besides the Survey rightly point out that there is need to also spend on health – increase the expense to 2.5-3% of GDP over time and FY22 will be critical. There is also need for poverty alleviation schemes which will come as the Kisan cash transfer and NREGA. Going beyond these programmes may not be possible due to non-availability of financial bandwidth. The Bare Necessities Index has improved over the years according to the Survey and the goal must be to take it further. Hence the point made here can be taken as a recommendation and not something that will be fully adhered to.
Sixth, the Survey does raise expectations by talking of a V-shaped recovery. While a statistical recovery is expected as a positive number which is double digits is better than a negative number, it should be remembered that the economy would just about get back past the FY20 level. To call it V-shaped, which is the fashion today, could be misleading as it would take at least 2 more years after FY22 to go back to the high growth path. Therefore, this optimism should be laced with some caution.
Last, the Report also opens the debate on credit rating agencies and sovereign rating. This is well placed as India has been a favourite destination of foreign investors and all government debt is in rupees. This is a vindication of the strength of the Indian economy. Yet is has always been put in the barely investment bucket which is not right. We do have a strong case for claiming a higher rating in the category of A if not AA. In fact, with a better rating several other funds which are constrained from investing in a BBB rated country would be more than willing to deploy their funds.
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