2021-22 Budget of NIRMALA needs a big push for Employment Generation

 While economic recovery signs are there, the challenges for India are too many, writes K R SUDHAMAN

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WITH green shoots visible after economic slowdown for several quarters at the beginning of 2020, Finance Minister Nirmala Sitaraman unleashed a medium term reform agenda in the February budget this year to make India a $5 trillion economy.  But this plan went awry with the coronavirus pandemic afflicting the entire world. With prolonged lockdown in India and elsewhere, the Indian economy went for tail spin.  As a result, there was recession in most parts of the world and practically all large economies barring China clocked the most unprecedented negative growth in decades.

With life limping back to normal on the hopes of vaccine becoming a reality, several economies including India are showing signs of economic recovery with the woes induced by the coronavirus pandemic slowly going away.

Though it may be still be too early for India to conclude that the economy has turned the corner, there is a strong possibility of a V-shaped recovery and some analysts have already forecasted that India may again be the fastest growing economy it once was, overtaking China in 2021-2022. A few have even predicted a double- digit GDP growth on the back of a low and negative base.

There is certainly a crisis of confidence in the economy at the present juncture and Nirmala Sitharaman will do well to push big-ticket structural reforms in her budget next February to return to high growth path on a sustained basis.

While the pandemic has brought a strong headwind for the Indian economy, it is to be noted that the economic growth had already been slowing down for several quarters before the pandemic.

While GDP growth had slowed down from 8 per cent in the Q1 FY19 to 3.1 per cent in the Q4 FY20, investment levels during the same period had declined from 30 per cent of the GDP to nearly 26 per cent. Thus, while the full resumption of economic activities may take us back to 2019-20 income levels, accelerating the growth trajectory requires addressing structural problems according to M Govinda Rao, a leading economist of the country and chief economic advisor of Brickwork Rating Agency.

The government will have to initiate measures to not only ensure the resumption of economic activities but also to address structural problems, the Brickwork Rating Agency said. Besides the progressive relaxation of restrictions, it suggested that the most important stimulus the government must undertake without any further delay is to clear all the pending bills of contractors. It will be pragmatic to undertake reforms in the tax structure. Further, reducing the tax rates on construction materials such as cement, steel, paints and plywood from the 'sin' rate of 28 per cent to a general rate would help revive the labour-intensive construction sector. The same is the case with passenger automobiles.

There is no denying of the fact that India is facing the worst economic crisis since 1991 and the fourth since Independence. Reviving the economy needs swift measures, which includes increased government spending and programmes for robust employment generation.

The complete 68-day lockdown and gradual unlock-1, 2, 3 and 4 of the economy of India is showing its effects now. Merely putting money in the hands of poor to spur demand might not work at this juncture as most of them used up their savings in the last few months in the face of job loss. So, putting any money in their hands now will only go to replenish their savings, thereby not fulfilling the task of encouraging consumption spending. Hence, better ways would be to step up public spending on infrastructure and on other job creating measures to revive demand.

The GDP growth in Q1 FY21 contracted by a massive 23.9 per cent. The ongoing recovery continues to face at least two risks: growing infections across the country and rising stress in state finances.

But the good news is that Purchasing Managers' Index (PMI) for manufacturing recorded at 52 in the month of August. A PMI value above 50 signifies expansion of economic activity. PMI (manufacturing) was in contraction zone between April and July. Maruti Suzuki, India's largest car maker sold 21.7 per cent more cars in August 2020 than it did in the same month last year. To be sure, these numbers are dispatches to dealers and not retail sales. However, these numbers do suggest that consumer demand is picking up with easing of lockdown restrictions.

India cannot claim to be out of the woods yet but positive signs are visible and the budget, if crafted well, could make economic recovery sustainable. COVID-19's disruption has not fully played off yet and one has to be cautious while pushing growth.

India's GDP (at constant 2011-12 prices) was estimated at Rs 26.9 trillion (US$ 363.49 billion) for the first quarter of FY2020-21, against Rs 35.35 trillion (US$ 477.67 billion) in the first quarter of FY2019-20, showing a contraction of 23.9 per cent, compared with 5.2 per cent growth in the first quarter of FY2019-20.

India needs to increase its rate of employment growth and create 90 million non-farm jobs between 2023 and 2030's for productivity and economic growth according to McKinsey Global Institute. Net employment rate needs to grow by 1.5 per cent per year from 2023 to 2030 to achieve 8-8.5 per cent GDP growth between 2023 and 2030.

A major positive aspect of the Indian economy is surging foreign reserves towards $600 billion mark and the current account remaining in the positive territory providing that much head room for much needed fiscal stimulus without impinging upon already widening fiscal deficit. The swelling foreign exchange reserves and the increased dollar purchased has put more liquidity in the system. This is good sign at the present juncture.

The Union Budget, presented by Nirmala Sitharaman in the Parliament on February 1, 2020, aimed at energising the Indian economy through a combination of short-term, medium-term, and long-term measures. Total expenditure for 2020-21 is budgeted at Rs 37.14 trillion (US$ 531.53 billion), an increase of 13 per cent from 2019-20 (revised budget estimates).

Numerous foreign companies are setting up their facilities in India on account of various Government initiatives like Make in India and Digital India. The Government is trying to boost the contribution made by the manufacturing sector with an aim to take it to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come up with the Digital India initiative.

The  Government  has  announced various economic packages, having a cumulative worth of around Rs 20 trillion (US$ 283.73 billion) and being almost 10 per cent of India's GDP to provided much needed stimulus to revive the economy hit by the lockdown.

With stimulus in place and more expected in the forthcoming budget as India's economy opens up and life fast returning to normal in the course of time, the country's GDP is expected to reach US$ 5 trillion by FY25 and achieve upper-middle income status on the back of digitization, globalization, favorable demographics, and reforms.

India is also focusing on renewable sources to generate energy. It is planning to achieve 40 per cent of its energy from non-fossil sources by 2030, which is currently at 30 per cent, and has plans to increase its renewable energy capacity from to 175 gigawatt (GW) by 2022.

India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behavior and expenditure pattern, according to a Boston Consulting Group (BCG) report. It is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by 2040 as per a report by PricewaterhouseCoopers.

In sum, there are positive signs now and Indian economy is looking to kick-start, but challenges too are manifold with the coronavirus disturbing the applecart and macroeconomic fundamentals. The inflation, too, has started surging at a time when the RBI and the government want to keep the interest rate low to kick-start the economy.

There are several reform challenges as well, coupled with the need to push government's disinvestment and privatization programme of public enterprises. The farmers' agitation is a disturbing factor to agricultural growth which has been looking good so far. The plate is full for Nirmala Sitharaman, and it would be interesting to see how she proposes to steer the economy back to a high growth path and make India a global manufacturing hub through Modi's atmanirbar programme. (IPA)

 (K.R. Sudhaman is an Economics Editor at the Financial Chronicle. Views are personal)