Budget must focus on recovering the lost ground
The first advance estimates of gross domestic product (GDP), released by the National Statistical Office (NSO), showed the Indian economy would expand by 9.2 per cent in the current fiscal year. Although the headline number looks impressive, it must be noted that the economy contracted by 7.3 per cent last year, and would barely cross the absolute level seen in 2019-20 in real terms. Real growth over FY20 would be just about 1.3 per cent if the given numbers hold. The NSO itself has rightly noted that these are early projections and may undergo revisions because of a variety of reasons. The biggest would be the surge in Covid-19 cases. Since the projection is based on the data for the first six-eight months, it may be overestimating growth.
The impact of a renewed surge in Covid-19 cases will be visible in the current quarter’s numbers. Several state governments have imposed restrictions on public mobility, which would affect output. Revised estimates for the last fiscal year would be released at the end of this month and can change the growth numbers for the current year. According to the available data, agriculture has been the only bright spot since the outbreak of the pandemic. It is expected to grow by 3.9 per cent in the current year on the back of 3.6 per cent growth witnessed in FY21. The gross value added in the trade, hotels, transport, and communication segment would be lower than the level witnessed in FY20. Also, the construction sector is expected to cross the level of FY20 only marginally. This partly explains the weak consumption demand in the economy. Private final consumption expenditure in real terms is likely to be about 3 per cent lower than the FY20 level. Since private consumption is the biggest component, its revival will be critical for the economy.
Growth in nominal terms, however, is expected to be significantly higher. The Indian economy is expected to expand by 17.6 per cent in the ongoing year. While this shows the kind of inflationary pressure the economy is facing, it will help the government manage its finances. Higher nominal growth also partly explains higher than expected growth in tax collection. Since the size of the economy is expected to be bigger than what was assumed in the Budget estimate (BE), it would help in containing the fiscal deficit at 6.8 per cent of GDP. The government, however, is also spending more than the BE and has got two supplementary grants worth Rs 3.28 trillion approved by Parliament. Given the support of higher nominal growth and tax collection, it would be important for the government to contain the fiscal deficit within the target without curtailing capital expenditure.
First advance estimates of GDP were introduced in 2016-17 to help the Budget-making process after its presentation was advanced to February 1. While the focus would be on nominal numbers for fiscal calculations, the government would do well to not overlook the real numbers, which shows how the economy has suffered over the last two years. The focus of the Budget, therefore, should be on attaining higher sustainable growth in the medium term with underlying realities that the pandemic may continue to cause disruptions for some time and the government will need to progressively bring down the fiscal deficit.