Economic recovery to enhance space for continued stimulus

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The Economic Survey projects a real growth rate of 11% for FY22 after the (-7.7%) drop in FY21 while the nominal growth for FY22 is placed at 15.4% with implied inflation of 4%. Over the two-year period, i.e., FY21 and FY22 this would translate into only 2.5% real growth and 13.4% nominal growth over FY20 levels. This provides reasonable space for continued stimulus on the fiscal side in the coming Budget and ergo there are enough pointers on that on the Economic Survey.

Firstly, the Economic Survey delineates the government’s approach to the Covid-19 response that accorded primacy to human lives over the economy. As was repeated earlier, this implies a deferment of fiscal stimulus till the demand side accelerator could be pressed when the recovery has set in.

Secondly, and more importantly, the Survey seeks to address two concerns of fiscal stimulus head-on — the fear of  increase in public debt and  implications for a rating downgrade.

Using the standard framework of debt sustainability of “Interest Rate Growth Rate Differential”, it seeks to reassure that India’s debt levels are sustainable even under a worst-case scenario. The Survey also makes a bold case of rating upgrade for India based on parity with comparable countries, historical track record and current macro parameters.

In terms of expenditure focus, healthcare has clearly gained ascendancy on the Covid-19 backdrop. However, it clearly makes a case for enhancing growth versus redistribution and thus we may see more tweaks in welfare policies to make it more effective in place of an increased spend. Elsewhere, the focus on supply-side stays whether through public or private agencies, be it in the arena of infrastructure spend, improving doing business relaxing constraints of excessive processes and emphasizing innovation.

For a change, the Economic Survey advises RBI on NPA management calling for more limited usage of regulatory forbearance to be followed by prompt Asset Quality Review (AQR). From the continued monologue of the need for fiscal rectitude from the monetary authorities on fisc., this is a welcome sign of more balanced fiscal and monetary policy dialogue.

In the past, the Economic Survey has served as a rather poor guide of the impending Budget. However, this gap has narrowed in recent years. As much as it calls for counter-cyclical fiscal policy it also cautions against fiscal irresponsibility. Taking the two we feel the Budget would make provision for a significant jump in both revenue and expenditure while articulating a tighter consolidation path henceforth.

Deficit and borrowing numbers are likely to come as a positive surprise for the bond market helping yields to stay rangebound. From the equity market standpoint, a stable yield and sector-specific measures are the two broad takeaways to look forward.

(The writer is an associate director-research of ASK Wealth Advisors. Views expressed are personal)