This year’s Economic Survey has cautious optimism written large
PremiumIts growth projection for our economy seems reasonable although oil at just $70-75 per barrel could prove too good to be true
The annual Economic Survey is a very important document on the state of the economy issued by an independent voice within the government. It comes just before the announcement of the Union budget and hence highlights the broad view taken by the chief economic advisor to the finance ministry. This time, it was presented by the principal economic advisor. As the ethos remains the same, it is a very useful pointer.
The overall evaluation of the economy in the Economic Survey of 2021-22 is positive, which is encouraging. This is the main takeaway from it. Did we know this before? The answer is ‘yes’, as all high- frequency indicators point to a strengthening of our economy, especially agriculture and industry, which can be monitored on a near real-time basis. But the twist is that the Survey talks of 8-8.5% growth next year. There are several caveats, such as those related to oil prices, global supply chains, a possible fourth covid wave, and so on. These are reasonable assumptions to make at the beginning of the year, though they can be contested, especially when one talks of oil being at $ 70-75 per barrel.
The chain process expected to result in growth above 8% has been indicated as being led by investment, which is refreshing. Low capital formation has been our Achilles heel for quite some time now. If the government were to spend more, as is expected, and private-sector investment picks up, we will finally see light at the end of the tunnel. We have heard of several aggressive policies, like the production-linked incentive (PLI) scheme, national infrastructure pipeline (NIP) and asset monetization plan, to name a few, which required both hands to clap. The Centre did, but the states have been hesitant. Further, private investment has been sluggish. If this changes next year, it will be effective.
A growth rate pegged at 8-8.5% is useful because we can now estimate that the budget will assume growth of 13-13.5%% in nominal gross domestic product (GDP) for its arithmetic. This is a critical number, as the entire budget will balance on this pivot. It sounds reasonable, given that inflation is likely to be 5%, which summed with the real GDP estimate would about match the nominal GDP estimate. Intuitively, this will also provide scope for higher capital expenditure, which is what has been indicated in the Survey. Will it see a 10% or 20% increase is what we need to watch for. The Survey also tells us that the fiscal numbers this year will be very good, which suggests that we might just over-achieve the fiscal deficit ratio and see it end up lower than what was budgeted. This will offer flexibility to either retain the deficit number at the revised level or reduce it by an aggressive 0.5-1%.
There are other positive takeaways too. The first relates to banking, on which it talks of banks being well capitalized. This is probably known, but the fact that it has been reiterated by the government after the Reserve Bank of India’s (RBI) Financial Stability Report stated so is an encouraging sign. This also means that we may not see any fresh recapitalization of banks in this budget, saving around ₹20,000 crore, which has been the average annual allocation for it in recent years.
Second, it advocates a shift in the agriculture sector’s focus to oilseeds and pulses, as these are the weak spots in our farming portfolio and have a pernicious impact on inflation. This is just advice, but farmers ought to follow it. Here, the states need to play an important role by gearing agriculture towards these crops and away from the traditional ones—rice and wheat.
The Survey expresses due concern on inflation. This is one factor that no one has any control over, especially since a significant part of it is imported. This is where the budget will have to be pragmatic and ensure no additional burden on the people. The Survey talks of a price of $ 70-75 per barrel of crude oil, while there are varied forecasts that go up to $120, as oil is queer product with supply restraints rather than constraints. The geopolitical situation can drive prices, which together with low re-investment in this sector during the pandemic after its price crash of 2020, has meant that this pain may last. From the Centre’s perspective, this is critical, especially for states because while people have accepted ₹100-110 per litre as the retail price for vehicle fuel, can we charge, say, ₹120 should the Brent price stay above $100 per barrel? This is a tough call to take, as it will affect the budget numbers. An error could lead to awkward situations where the Centre and states have to discuss ways to check prices, which could end in an impasse.
Inflation is a nuisance for monetary policy too. This is so because its trajectory will determine when and how to unwind the surplus liquidity that exists today. Starting the process now and then having to go back even as private demand picks up would pose a conundrum that RBI and its monetary policy committee may not like to face. This will probably be the crux of its committee meeting on 7 February.
The annual Economic Survey has always offered a thorough documentation of everything that has happened during the year and details all the policies that have been employed. This report does even better by highlighting the roses as well as the thorns, so that we exercise care while going through the bouquet.
Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Hits & Misses: The Indian Banking Story’. These are the author’s personal views.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!