Rajiv Mishra
Timely containment measures, sizeable monetary expansion and protracted fiscal stimulus prevented the economy from slipping into recession in FY 21
The Economic Survey chapter on State of the Economy (SOE) 2020-21 – A Macro View, is a fluent narrative of the Indian economy in a COVID-19 world, first pushing itself to limit contraction of output and subsequently achieving a sharp V-shaped recovery with the help of timely and effective policy interventions by the Government. It further explains the futuristic underpinnings of Government policies that are intended to lift the economy back to its pre-pandemic growth path.
The SOE describes the policy dilemma of lives versus livelihoods faced globally at the beginning of the pandemic forcing countries to choose between the two. Deploying the containment strategy India initially chose lives but soon enough livelihoods as well once the system to handle the pandemic was in place to hasten the unlocking of the economy. The result was a 23.9 per cent year-on-year contraction of GDP in the first quarter of FY 21 followed by a much smaller shrinkage of 7.5 per cent in the second quarter and thereafter by a steady decline in the pandemic curve. It was the accurate timing of the lockdown and gradual pace of its unlocking that made India resolve the dilemma earlier than others.
The monetary strategy discussed in SOE is built around the measures taken by RBI to support businesses by reducing cost of borrowing and boosting liquidity. The RBI administered cut in policy rates, launched open-market and long-term repo operations, reduced banks’ CRR, raised banks’ borrowing limits, granted term loan moratorium and interest deferral, and enhanced ways and means advances of Governments, among others. The significant cut in policy rates seems to be the standout feature of the strategy as it risked provoking capital flight from the country. However, the global liquidity glut caused by advanced economies trying to pull themselves out of pandemic induced slowdown prevented the capital flight. In fact, the growth promise seen in emerging market economies, particularly India, has been continuously attracting capital into the country.
The fiscal strategy to deal with the pandemic initially provided a safety net to vulnerable segments of the population that included healthcare support, food supplies, cash transfers, loan guarantees, interest subsidy and tax deferrals, among others. Later in the year the fiscal strategy shifted gears to strengthening consumption. As explained in the SOE, the need for protracting fiscal stimulus was to align it with the evolution of private consumption demand. During the initial period of uncertainty, the private consumption demand was low and limited to essential spending as the perceived need of the people was to augment precautionary savings. Accordingly, fiscal spending provided for meeting essential consumption. As uncertainty cleared with the easing of lockdown, people started spending on discretionary non-essential consumption. Growth picked up requiring additional fiscal stimulus to provide only a tailwind to the incipient recovery. Thus, alignment of fiscal response with changes in private consumption ensured non-wastage of fiscal resources.
The SOE next explains the role of structural reform in resurrecting the growth potential of the economy. Freeing of agriculture marketing, definitional change of MSME to support growth and job creation, enactment of four labour codes, reducing cross-power subsidies, disinvestment of PSUs and commercial mining in coal, were the major reforms announced by the Government. These reforms together with the ones implemented over the last 6-7 years are intended to further ease the binding constraints on private sector investment.
The economic outlook in SOE projects the real GDP growth at 11 per cent in 2021-22. IMF in its January, 2021 update projects it at 11.5 per cent. These projections are inspired by GDP growth in 2020-21, sequentially expected to increase from (-)19.4 per cent in H1 to (+)23.9 per cent in H2. Within H1 itself GDP growth has sequentially increased from (-)29.3 per cent in Q1 to (+) 23.2 per cent in Q2. Such jumps in sequential growth rates do not reflect an economy in recession. On the contrary they show the economy staying on track strategically navigated by containment measures, monetary expansion, fiscal stimulus and structural reforms.
(The author is Economic Adviser, Ministry of Finance)
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