SynopsisMany economic indicators signal a robust recovery. But the rising Covid curve and the inability of several states to spend can dampen India’s growth this fiscal year.
A year after the lockdown began, the Indian economy appears to be healthy, self-assured and resilient. As the nation is set to enter into a new financial year — 2021-22 — there are more hopes than hazards. Unquestionably, the worst is behind us.
Multiple indicators — including investment sentiments on the ground, market buoyancy, sustained healthy GST (goods and services tax) numbers, a proposed 34.5% hike in capital expenditure budget for the coming fiscal year and Reserve Bank of India’s recent business expectation survey — have signalled the same. A robust financial year (FY) is on the cards ahead, seems to be the consensus. India Inc had stepped into FY21 with apprehensions a week after nationwide stay-at-home order was issued in March 2020 to curb the spread of Covid-19 virus. Now, the same set of companies will embark on FY22 with gusto. Optimism and conviction are clearly apparent among corporate biggies.
“Current investment sentiments are very high. That will have an impact with some lag on consumption, jobs etc,” Chief Economic Adviser KV Subramanian tells ET Magazine, adding that a V-shaped recovery — which the government had predicted earlier — is well on track. A massive vaccination drive, he argues, will only expedite the upward movement in the graph.
The recent Economic Survey has projected an 11% growth for the coming fiscal year. One needs to discount the exuberance around a double-digit growth number due to a low base effect in the current financial year — growth shrank by 23.9% in Q1 and 7.5% in Q2, which is bound to artificially inflate the number next FY.
Other indicators — such as robust foreign direct investment (FDI) inflow of $68 billion in the first nine months of 2020-21, benchmark stock index Sensex hovering around 50,000, the Centre’s decision to raise the capital expenditure budget to Rs 5.54 lakh crore — demonstrate how economic activities are on a roll.
Also, serial economic reforms after the outbreak of the pandemic and the rolling out of a production linked incentive (PLI) scheme for manufacturing have ignited hopes for the next fiscal year.
Finance Minister Nirmala Sitharaman had in her budget speech announced the government would dole out Rs 1.97 lakh crore as cash incentives over five years starting 2021-22 to manufacturers in 13 sectors under the PLI scheme.
“About 60% of India’s infra spend comes from states. One dark cloud in the horizon is the states are expected to remain fiscally challenged in the coming financial year. That will somewhat dampen the enthusiasm brought in by the budget as well as continuous GST uptick”
— Vinayak Chatterjee, chairman, Feedback Infra
If these aren’t enough, the cabinet earlier this week approved a bill for setting up a Development Finance Institute (DFI) to raise long-term capital for core sector projects. The budget had said the government would infuse Rs 20,000 crore to capitalise the new entity. The government expects the DFI to raise about Rs 3 lakh crore in the next few years mainly due to its access to market funds. A part of the action and enthusiasm will likely be seen in the forthcoming financial year.
The chairman of Foundation for Economic Growth and Welfare and former CEA, Arvind Virmani, argues the structural reforms undertaken since September 2019 constitute a systematic effort to decontrol the economy. “Those will promote competition, enhance productivity and stimulate fast GDP growth,” he says.
Since the reforms of the 1990s, the recent announcements are a clear attempt to transform the economy, by taking it out of the grips of bureaucratic socialism to a more modern welfare state, he says. This redefines the role of the government as it will at best be a facilitator. This long list of good news could also mean a healthy tax collection for the government.
“Keeping in view the economic uptick, encouraging inflow of foreign investment and supportive government policies, it is likely that revenue collections should see growth in the coming financial year,” says Vikas Vasal, national managing partner (tax) at Grant Thornton Bharat. He further says tax reforms such as lower corporate tax rates, faceless assessments, simplification of procedural matters and use of modern analytical tools to identify tax leakages in the system, should all start yielding results next financial year.
“Keeping in view the economic uptick, encouraging inflow of foreign investment and supportive government policies, it is likely that revenue collections should see growth in the coming financial year. Tax reforms like lower corporate tax rates, faceless assessments, etc should all start yielding results”
— Vikas Vasal, national managing partnertax, Grant Thornton Bharat
However, the economy can also face a dampener triggered by either an unbridled rise in Covid cases or the inability of states to spend more, or a combination of both. Also, economic revival and consumption boost tell only half the story of the robust GST numbers seen during the last six months. Significantly, GST collection in January was an all-time high at Rs 1.2 lakh crore before marginally dropping in February (Rs 1.13 lakh crore).
Good numbers can be partly crafted by better compliances, according to experts and officials. Chairman of Feedback Infra Vinayak Chatterjee sees an opportunity and a threat. DFIs can propel a significant rise in the order book of core sector projects. But, he points out, states are expected to remain fiscally challenged in the coming financial year. “That will somewhat dampen the enthusiasm brought in by the budget as well as continuous GST uptick.”
After all, about 60% of India’s infra spend comes from states. A report on state finances by RBI had detailed how state governments took a body blow in the first half of the financial year due to the pandemic, adding that their gross fiscal deficit was projected to widen beyond 4%.
In the last couple of months, the situation has marginally improved. These are still minor challenges when compared with rising Covid cases, seen during the last couple of weeks, though vaccination numbers are also rising.
According to a Union health ministry press conference held on Wednesday, about 70 districts in 16 states registered over 150% increase in active Covid cases in March 1-15, while another 55 districts registered a 100-150% rise during the period. Almost half of the new cases cropped up in Maharashtra, prompting local authorities to impose mini lockdowns and restrictions. Other states that have seen rising Covid cases include Punjab, Karnataka and Madhya Pradesh. These are not good signs for an economy on the recovery path.
“Till vaccination does not happen to a large threshold, Covid will continue to be a risk factor that we need to be aware of,” CEA Subramanian warns. It is time to accelerate the vaccination programme, allowing companies to procure vaccines in bulk and immunise their workforce irrespective of age or comorbidity. Both life and livelihood should be given equal attention to ensure a sustainable growth trajectory.
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