A Decent Budget But Big Challenges Remain

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).