Reversing Economic Decline

The Indian economy is fraught with staggering conditions. Its major economic indicators are somewhat disturbing. Many of them are moving in an opposite direction. The GDP growth is shrinking (-7.7 per cent) while the fiscal deficit is whooping at 9.8 per cent. The economy shows the signs of simmering consumption, deficient demand, stagnant investment and low savings.  Moreover, the economy vindicates jobless growth, swelling unemployment, reverse migration and galloping inflation trend. On the sectorial front, agriculture hints abysmal productivity growth, manufacturing unfolds virtual decline (14 per cent) and services reveal inadequate growth. Nevertheless, the foreign direct investment (FDI) recorded a phenomenal improvement of 13 per cent while as exports and imports registered an uneven growth. This all raises serious eyebrows upon the existing economic panorama of the country. Given these conditions, placing economy on the trajectory of sustainable long-term growth of 12 per cent is somewhat a daunting task especially at a time when the pandemic has hit the economy excessively on all fronts and pushed it into a state of recession. This being so, it seems hard to reverse the recession in the immediate future unless some distinctive economic decisions are taken for the purpose.

Under these circumstances, the primary effort of the government through the new policy discourse has been to push consumer demand and bring more investment in the economy. In this context, it is heartening to note that the Budget 2021-22 has adopted Capex Route Discourse to augment growth with 15.91 per cent in the current fiscal expenditure  aggregating to Rs 5.5 trillion, with a record jump of 34.5 per cent from the previous budget. The capital expenditure – the growth centric policy mechanism- has been viewed by economic think tanks as a viable measure to usher consumer demand and economic revival. However, the budget does not spell out a viable policy discourse of the government to bring down the fiscal deficit to 6.8 per cent in the ensuing financial year. Unarguably, tapping requisite revenue income to restrict proposed fiscal deficit is somewhat unexplained mystery in the budget despite the fact that the Budget 2021-22 revolves around six pillars viz; 1) Health and Well-being; 2) Physical and Financial Capital and Infrastructure; 3) Inclusive Development for Aspirational India; 4) Reinvigorating Human Capital; 5) Innovation and Research and Development; and lastly 6) Minimum Government and Maximum Governance. Though on the health care and wellbeing of the people, the budget proposed an outlay of Rs 223,846 Crores of which Rs 35,000 Crores are earmarked for vaccination programme. It is worth to unfold that actual spending on health sector is almost equal to that of previous allocations and thus there is no such apparent surge in the new budget. However, it would rejuvenate health facilities and can bring phenomenal improvement in health sector in the country provided the proposed spending is aptly administered and prudently delivered. Understandably, the government has earmarked 20,000 Crores in the Budget: 2021-22 for the coming five years on infrastructural development through the Development Finance Institution (DFI) to undertake massive infrastructural development. This investment package will have immediate effect on employment and income generation. But its success would depend upon how far the DFI executes its role in the coming years and effectively leverages from the capital contributions of the government and other long term investors like pension funds, sovereign funds, development partners and international capital markets. Moreover, for fueling additional job oriented growth, the government intends to incur Rs 1.18 trillion for development of roads and highways in next five years besides investing Rs 3.6 trillion for power reforms thus infusing competition in the sector. The move seems apparently somewhat attractive. In the long run, nonetheless, privatization of power distribution and sale through private firms may prove counterproductive for the government and may be disadvantageous for the poor, the weaker sections and of course for the companies engaged in export business enjoying special power tariff concessions. For such companies, the terms of trade are likely to become adverse and less competitive.  Further, for securing more funds to finance the long term infrastructure and employment generation projects, the government decision to sell out its two public sector banks and General Insurance Corporation (GIC) is a welcome move. It may, however, be stated that it is only the time which will prove whether government can practically do it or not.  Surely, the government will have to face daunting resistance from the employees of these sectors against the privatization move of these units. Consistent to this, it is appropriate to unfold that the revenue from disinvestment record of government in preceding two years has not exceeded 45 per cent of budget estimates and notably for the current financial year it has remained lowest 15 per cent of the budget estimates. Therefore, setting lofty target to raise Rs 1.7 trillion through disinvestment process for the year 2021-22 seems somewhat difficult to achieve. The effort of the government is rightly to push capital expenditure, restrain unproductive expenditure and spurt the growth. This naturally demands all round development of all the sectors of economy. The agriculture considered as a backbone of Indian economy has grown over 2.8 per cent during the last year and is projected to grow by over 3 per cent during 2021-22. Nevertheless, the financial allocation to the sector has seen only a minimal improvement (just 2.02 per cent) for the fiscal year 2020-21 when compared to the previous year 2019-20 which  had received 140 per cent of budgetary allocations during 2018-19. This can have serious consequences for its future growth and can compound the issue by the predominant contraction in government’s subsidy allocation for pesticides by around 40 per cent, reverse migration and fall in the financial allocation for MGNERA by almost 30 per cent. All these aspects can have adverse impact upon agriculture. It is distressing that the growth of manufacturing sector has slipped aggressively during 2020-21 due to lockdown. The capacity utilization of the sector has fallen from 73.8 per cent to 47.8 per cent indicating that the sector will take time to restore to the pre-Covid-19 level. The performance of key manufacturing industries including auto sector, machinery and metals are expected to remain in doldrums in 2021-22 due to inherent factors of 2020-21. Contrarily, the service sector saw sharp decline during the year 2020-21 and many sub-sectors of service sector including tourism, hotels, transport and hospitality recorded whopping decline of 16 per cent. The same is equally true of financial and banking services where the extent of NPA doubled (13.5 per cent) in 2020-21 compared to the last year as indicated by the stability report of the RBI.  However, it is appreciable to note that the government has constituted the Asset Reconstruction Company (ASC) and Asset Management Company (AMC) with initial capital of Rs 10,000 Crores to help banks/financial institutions to overcome the problems associated with their bad loans and stressed assets. This would surely help the banks to improve and consolidate their asset position and would certainly go a long way in reducing their proportion of overall NPA.

In view of the above scenario and given the whole slew of government measures set in the Budget: 2021-22 (subject to the condition that the Covid-19 remains under control and uneven climatic conditions stay supportive), it is expected the economy will bounce back pretty quickly in the ensuing fiscal year.

Dr Mehraj Ud Din Shah is working as Associate Professor, Department of Commerce, Central University of Kashmir, Green Campus, Ganderbal.