Adding Fuel To Economy

The global economy is recovering from the pandemic led economic losses but the renewed surges of the pandemic in some jurisdictions in the second half of 2021 is worrisome. Taking note of some loss of pace in H2 2021, IMF has revised downwards its forecast to 5.9 per cent in 2021, indicating supply chain bottlenecks and rising energy prices as downside risks. However, from the domestic side, India has seen a strong rebound in economic activity with the subsiding of the infections and ease of localised restrictions, aided by massive vaccinations across the country. 

With this, India’s real GDP grew by 8.4 per cent in Q2 FY22 while real GVA increased by 8.5 per cent, a tad higher than the GDP growth. Despite the smart growth of 20.1 per cent and 8.4 per cent real growth in Q1 and Q2, respectively, a real loss of Rs 3.2 lakh crore still needs to be recouped to reach the pre-pandemic level. Sector-wise data indicates that ‘Trade, Hotels, Transport, Communication & Services related to Broadcasting’ are still the most impacted sectors and the real loss of Rs 2.6 lakh crore is still needed to be recouped in this sector. Overall, the economy is still operating at 95.6 per cent of the pre-pandemic level (with ‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ still at 80 per cent) and should take one more quarter to recoup the losses.  

Though we expect GDP growth for FY22 to top 9.5 per cent and in the range of 7-9 per cent for FY23, the future growth will largely depend upon the consumption recovery. In absolute real terms, private consumption, government consumption and capital formation have still not attained the level seen in FY20. Private final consumption expenditure (PFCE) posted an uptick on a y-o-y basis due to a faster resumption of contact-intensive services and restoration of consumer confidence but remained below 2019-20 levels. Overall, the diagnosis of the economy on the domestic front is output which is still below the potential level and is facing high inflationary pressure. The consumption recovery in the H1 FY22 is not broad-based. The revival of consumption demand holds the key to overall recovery. 

Continued direct transfers under the PM Kisan scheme are supporting rural demand. The demand for work under the MGNREGA has moderated in Nov/Dec from a year ago, suggesting a pickup in farm labour demand. 

The results of the corporates indicate that they have gained strength and resilience through the pandemic. Bank credit growth is also showing signs of a gradual recovery, led by the retail segment, mainly by home loans, Xpress credit and gold loans. Corporate growth was impacted by lower utilisation, pricing pressure, holding on of private investments and big-ticket resolutions. The growth in retail loans is more of an industry trend, with pandemic acting as a booster for the tectonic shift but at a broader level, it reflects the aspirations of resurgent India, with a constantly expanding middle class seeking ‘ease of living while getting attuned to affluence too, in an increasingly globalising world that swiftly embraces digital platforms. Additionally, the upwardly mobile rural population throws new vistas of opportunities as they move up the ladder on multiple pivots, well anchored by enabling policy measures. 

Going forward, revenue expenditure (less of interest payments and subsidies) of the Government (Centre + 18 States) during November-March 2021-22 is expected to grow by 27 per cent, after accounting for expenditure proposals contained in the SDG-2 and assuming States will meet their budgeted targets. Similarly, capital expenditure is expected to grow by 54 per cent during November-March. The higher revenue expenditure growth, a proxy of government final consumption expenditure, is expected to support economic recovery, while robust capex could crowd in private investment and improve medium-term growth prospects. 

However, everything depends upon how the fear of Omicron or the third wave materialises. Globally, in the wake of surging infections, supply chain snags, logistic disruptions and inflation touching multi-year highs in several economies, Omicron is sparking fresh waves of containment measures and travel restrictions. These developments have tempered the momentum of global growth and trade, even as mounting inflation risks have brought forward policy normalisation timelines in several countries. 

Domestically also, concerns revolving around the spread of Omicron are surfacing. It might derail the nascent growth. While the low domestic infection count (less than 15,000 per day), healthy pace of vaccinations (65 per cent of the eligible population is fully vaccinated) and introduction of ‘precautionary dose’ augurs well for the economy, the looming threat of Omicron calls for observing greater caution and readiness to respond swiftly. 

Going forward, the main objective of the budget should be to create an environment that will give further impetus to growth by creating an enabling condition by giving higher weightage to short term stabilisation policy rather than a long-term policy. The budget should also allow for very gradual fiscal consolidation. Further, rationalising the existing taxation structure on contractual savings to promote savings is also the need of the hour. At current savings, financing of growth looks difficult beyond the potential growth of 6 to 6.5 per cent. Additionally, there is a need for the rationalisation of taxation on domestic fuel, which will directly impact the consumption demand. However, this needs the coordination of the centre as well as the States at the highest level. 

Dr. Soumya Kanti Ghosh

Guest Author Group Chief Economic Advisor, Economic Research Department, State Bank of India.