Context: While the budget assures double-digit growth in FY22, but does little for unemployment, inflation, foreign trade and medium-term growth.
Key Elements of Pandemic Induced Economic Crisis
Economic decline: by 16% in the first half of the fiscal year 2020-21 (FY21); The initial, officially projected full FY21 fall in GDP was a record 7.7%.
Huge employment loss: millions still suffering from continued loss of jobs and earnings.
High inflation: remained high for much of FY21.
Revenues plummeted, and expenditures rose: leading to record fiscal deficits and debt levels.
Collapse of foreign trade.
Macro-Economic Challenges before Budget
Restore output levels: If there is no further growth in FY21 (over the FY20 level), GDP will grow by about 9% in FY22. (Budget has introduced high deficit (about 7%))
Encourage rapid medium-term growth beyond FY22: past policies and pandemic shock have compounded three major dampeners to medium-term growth prospects-
High Public Debt: 90% of GDP by end March 2021, rose 14% combined (Centre plus states) deficit.
High Nonperforming assets ratio could weaken the capacity to finance productive economic activity.
Budget proposal of Privatization and quasi “ bad bank” will take years to relieve stress in Indian banking.
Rising protectionism in trade policies since 2017.
Mitigating massive employment and livelihood scarring: inflicted by pandemic, lockdowns and earlier shocks such as demonetization would be difficult due to the following reasons-
Dismal labour market indicators: as per Centre for Monitoring the Indian Economy data and labour force survey for 2017-18.
Impact on the informal sector: with 85% of India´s labour force.
Avoiding consumer inflation: keeping inflation below 6% will be tough because -
For financing high fiscal deficits (nearly Rs10 trillion), the Reserve Bank of India will have to keep liquidity conditions exceptionally lax.
With private activity recovering, excess liquidity is likely to stoke higher inflation.
Encourage recovery of trade and exports, especially with dynamic East and Southeast Asia would be difficult due to protectionist trade policies (continuing tariffs weakening balance of payments).