GS-2: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Growth & fiscal consolidation
Context: The National Statistical Office (NSO) released the first advance national accounts estimates for 2021-22 on January 7, 2022. India’s real GDP growth in 2021-22 is estimated at 9.2%
It is 30 basis points lower than the projection by the RBI and IMF projection of 9.5%.
Challenges to the 2021-22 growth forecast
Due to the three waves of COVID-19 that India has experienced, two years of real growth in economic activities have been wiped out. The economy has to now start on a clean slate.
The adverse effect of the third wave of COVID-19, which is mainly affecting the last quarter of 2021-22, may call for a further downward adjustment in the growth rate to about 9%
The main sectors that have held back a more robust recovery are trade, transport,etc. on the output side and privatefinal consumption expenditure (PFCE) on the demand side (low growth of 6.9%), whose estimated 2021-22 figures remain below the corresponding levels in 2019-20.
Growth in 2022-23 would also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products.
Growth prospects of 2022-23
IMF and OECD forecasts have indicated growth rates at 8.5% and 8.1%, respectively.
Growth in 2022-23 would depend on the basic determinants such as the saving and investment rates in the economy.
The gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in 2021-22.
The implicit price deflator (IPD)-based inflation which was as high as 7.7% in 2021-22, may come down to about 5%-6%.
Thus, we may expect a nominal GDP growth of about 12%-13% in 2022-23. It is the nominal magnitude which is crucial as far as the Budget is concerned.
With good buoyant tax revenues, the Government may be able to limit the 2021-22 fiscal deficit to its budgeted level of 6.8% of GDP although a marginal slippage may be possible.
Tax buoyancy is an indicator to measure efficiency and responsiveness of revenue mobilization in response to growth in the Gross domestic product or National income.
A tax is said to be buoyant if the tax revenues increase more than proportionately in response to a rise in national income or output.
What measures government need to take to support growth in next fiscal?
The major corporate income tax (CIT) reform undertaken in 2019-20 had provided a concessional rate of 15% for fresh investment in manufacturing by domestic companies provided their production took off on or before March 31, 2023.
As nearly two years have been lost due to COVID-19, the Government may consider extending the time limit for availing this benefit of CIT reform.
The GST compensation provision would also come to an end in June 2022, which may impact the revenues of certain big states. Hence, GST Council may consider extending the compensation time period to tide over the setbacks caused by COVID-19 pandemic.
With respect to non-tax receipts, the scope of the National Monetization Pipeline (NMP) may be extended to cover monetisation of government-owned land assets. Disinvestment initiatives may have to be accelerated.
Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand.
Some fiscal support in the form of an urban counterpart to MGNREGA may be considered to support some of the sectors which are directly impacted by COVID-19.
The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% (6% in worse scenario) of GDP for 2022-23. At this point, while supporting growth is critical, signalling a return to fiscal consolidation is also important
