A Decent Budget But Big Challenges Remain

Business Standard     11th February 2021     Save    

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).