The current nascent economic recovery has to be made sustainable, as only then will the pro-growth thrust of the recent Budget will materialise. The latest results of the third quarter of FY21 have shown positive signals across several sectors, plus growth of 0.4 per cent after two consecutive quarters of contraction. There are many encouraging developments -- some new investment tech start-ups having surged during the pandemic and continuing to increase; Rs 1.13 lakh crore GST mop-up in February, pointing to stable economy with better compliance; cost-efficiency drive aiding companies’ profitability; $31bn lined up for 400 port projects across the 7,500-km coastline and the government to promote use of renewable energy in the maritime sector.
Key sectors like metals, construction, automobiles and banks are witnessing a turnaround. Power generation is rising. Non-food bank credit is growing, albeit unevenly. Agriculture and allied activities, the backbone of the rural economy, are depicting an uptrend in credit growth, mirroring resilience and better harvest. Agro-economy products -- edible oils, plantation crops and sugar, are all showing robust performance.
In sync with the Union Budget, some state governments - Rajasthan, Uttar Pradesh, Odisha, Bihar and Tamil Nadu - have presented their budgets focusing on infrastructure and industrial development. These will soon be followed by the budgets of Maharashtra, Gujarat and Karnataka, which are expected to provide reinvigorated thrust to infrastructure, employment generation and livelihood projects.
The budgetary expenditure of all 28 state governments will have higher economic impact than the Central Government’s because of the sheer size of the former. More notably, the capital expenditure of all state governments considered together amounts to around 2.5 per cent of the GDP, compared to the Centre’s average of 1.6 per cent in the last decade.
Though the green shoots of recovery are visible, the economic revival process continues to remain fragile. The renewed surge of Covid-19 infections poses a major risk. A lot of uncertainty surrounds the various vaccines. The silver lining is that the vaccination drive has been opened to the private sector. Consumer spending, the driving engine of Indian economy, accounting for 60 per cent of the GDP, fell 2.4 per cent in Q3, despite it being a festive one.
Private sector investments have yet to take off in a meaningful way. Bond market pressure is being reflected in the stock market. The market seems surprised by the government’s huge borrowing programme. With the rapid pace of technology unleashing new threats, companies are increasingly becoming more vulnerable to data theft and misuse. The informal economy is in pain and presents a grey area for authorities. The government needs to do more to support businesses, particularly MSMEs, some of which are still bleeding.
The most important objective of the political economy is quality employment generation, which enhances the nation’s economic potential. Employment, especially quality jobs, declined amid Covid-19 restrictions. Of course, the production-linked incentive (PLI) scheme is expected to create its own ecosystem of creation of jobs. India just cannot afford any more jobless growth.
The plethora of measures announced by the government before, in and post-Budget all have and are accelerating the growth momentum. Pro-active policies should particularly consider the obstacles on the ground where the last-mile completion occurs. Incentivising state-level reforms must be accelerated, an approach favoured by the 15th Finance Commission. Further, the bureaucracy needs solid transformation, as carrying out reforms is its key responsibility.
An attempt at ‘lateral entry’ of talented and motivated people into bureaucracy, to contribute towards nation-building is being made. Excessive centralisation of skilling programmes should be avoided, as this may hinder the ability of training institutions to effectively respond to market requirements.
Further, care has to be taken that without legislative back-up, the government should not amend rules. The GST Council should prevail on the government to avoid such practices, as these may lead to unnecessary litigation. It is also important to evolve an accessible and affordable judicial system.
The Budget clearly reflects the fact that this government is unafraid to be different and change its mindset towards growth, solely to aid sustainable economic revival. With the right fiscal and monetary policies in place, it is possible to ensure that Covid leaves no permanent scars on our economy.
At the same time, we need to look out for rising protectionism, the misuse of digitisation and climate change risks with the potential to derail the revival of economic growth. Besides, markets seem to be on tenterhooks, as inflation fears have started overtaking recovery hopes.
According to the latest RBI bulletin, petrol and diesel prices paid by the Indian consumer are among the highest, globally. This is due to hike in indirect taxes. Further, systemic risk concerns have been raised by the RBI, the financial stability board and the SEBI over the disconnect between financial markets and the real economy. However, this disconnect is a global phenomenon.
Another recent risk concerns the eruption of cryptocurrencies. Though the government has not yet brought taxability of bitcoins into the statute books, it cannot be ruled out because Indian income-tax laws have always sought to tax income received, irrespective of the form in which it is received. US Treasury Secretary Janet Yellen describes bitcoin as an extremely inefficient way of conducting transactions. A high-level Indian committee has suggested prohibiting such private currencies. The RBI is not in favour of legalising cryptocurrencies.
Though the underlying block-chain technology needs to be exploited as it has potential, the problem lies in people’s handling and managing cryptocurrencies. When some real risks to economic recovery still prevail, the country cannot afford adventurous speculators, dabbling in volatile and risky investments. The government plans to introduce a bill in the Lower House that would ban private cryptocurrencies like bitcoin, and create a national digital currency.
In sum, 2021-22 is likely to be a game-changing year, as there has been a definite pro-growth shift in government policy. In the journey forward, numerous implementation challenges loom. However, the implementation of timely privatisation is extremely important. Somehow, the country’s track record on implementation has not been good. The basic thrust, to grow our way out of this once-in-a-century crisis, is the appropriate one.
This time, the government seems fully prepared. Industry has already started showing its willingness to support the change in the government’s mindset. Further, e-commerce is right to seek a slot in India’s trade basket. For more sustainable revival, the trigger will still need to come from government investment spending, with huge multipliers leading to crowding in private investments. The reliability of our statistical system also has to be ensured.
For gauging economic recovery, gross value-added (GVA) and not the GDP, should be taken into account, as it is based on the primary source of data. The GDP is calculated on the expenditure side, which is mainly derived data. Accelerated vaccination is key to sustaining the growth momentum. Also strengthening our socio-economic recovery has become paramount, along with realising that some real risks to a sustained growth could be lurking around. There is no room for complacency if the nation has to realise sustainable improvement in its competitiveness for inclusive economic growth.
There is little doubt that the present recovery is based on revival of consumption. This has to be extended to revival of investments, so that a virtual cycle ensues. Both the public and private sectors have a unique opportunity to rewrite together the economic history of India. It is a dream come true that policymakers are facilitating the process. Keep your fingers crossed, as the clock has started ticking.
The writer is a corporate economist.