Striking an optimistic note on economic recovery, the Economic Survey on Friday said that the Indian economy will rebound to 11 per cent real GDP growth next fiscal on the back of a V-shaped recovery post lifting of the lockdown and the ongoing rollout of mega Covid vaccination drive.

The rebound from an expected 7.7 per cent contraction in real GDP for 2020-21 will be led by the low base and continued normalisation in the economic activities as the rollout of Covid-19 vaccines gets traction, said the Economic Survey for 2020-21 tabled in Parliament by Finance Minister Nirmala Sitharaman.

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Growth pangs

The nominal GDP growth is pegged at 15.4 per cent in 2021-22, it said. The latest Survey came on a day when the Central Statistics Office revised downwards India’s GDP growth for 2019-20 to 4 per cent from 4.2 per cent. The CSO also raised India’s GDP growth for 2018-19 to 6.5 per cent from 6.1 per cent. The Indian economy had last seen a contraction, of 5.2 per cent in fiscal year 1979-80. The architect of the Survey, Chief Economic Advisor to the Finance Ministry, Krishnamurthy Subramanian, said that the mega vaccination drive should enable recovery in services. “V-shaped economic recovery without a second wave makes India a sui generic case in mature policy-making,” he said. He highlighted that India focussed on saving lives and livelihoods. It took short-term pain for long-term gains.


Cricketing analogies

The Survey also likened India’s Covid-19 response to the recent famous cricket series win in Australia. “Like in cricket, even in economy planning matters, when the ball is swinging around a lot, when there is a lot of uncertainty, you need to play carefully, focus on survival, but once the swing is gone, you should actually start playing shots.

Essentially, when the ball is swinging, bat like Pujara and when the swing is gone, bat like Pant, which is what the Indian economy and policy- makers should focus on,” he said. The Survey indicated that the fiscal deficit for 2020-21 is projected to overshoot the earlier estimate of 3.5 per cent of GDP. It has made a case for a counter cyclical fiscal policy stance, basically requiring the government to spend more without worrying about the fiscal deficit. It called for a ramp up in public healthcare spending from 1 per cent to 2.5-3 per cent of GDP.

Fiscal policy support

Subramanian said that fiscal policy must support growth till the pre-Covid growth level is regained. “Public investment spending is self financing in the medium term because it enables growth and crowds in public investment. In this context, India’s fiscal rules, which may not be enabling counter cyclical fiscal policies, must need a rethink”, he said.

Ratings dissonance

In particular, the Survey highlighted that India’s sovereign ratings do not reflect its fundamentals and nudged the global rating agencies to become more transparent and less subjective. It called for the Indian policy-makers to act freely.

Subramanian said India’s entire external obligation is less than the total forex reserves. Therefore, India actually resembles a negative debt company, whose ability to repay, by definition, is 100 per cent. “So on both willingness to pay and ability to pay, India should have the highest rating and that is consistent with the large literature that highlights bias in sovereign ratings,” the CEA said.

On consumer price inflation, the Survey pegged its forecast for 2021-22 at 4-5 per cent. It has also made a case for revision in the base year of the CPI from current 2011.

On regulatory forbearance, the Survey said that policy-makers should lay out thresholds of economic recovery at which such forbearance measures will be withdrawn. Prolonged forbearance is likely to sow the seeds of a much deeper crisis. A clean-up of bank balance-sheets is necessary when the forbearance is discontinued.

Arvind Virmani, Chairman, EGROW Foundation, said the Survey's 11 per cent GDP growth forecast for FY22, is very consistent with -7.7 per cent growth in 2020-21, as given in NAS advanced estimates for 2020-21. “Given the pandemic uncertainty, I still expect GDP growth to be -7.5 per cent or higher, in which case growth in FY22 could be a little lower,” he added.

Madan Sabnavis, Chief Economist, CARE Ratings, said that the 11 per cent growth number comes over a negative base of -7.7 per cent contraction in GDP and hence should be interpreted with caution.