The most anticipated economic survey ahead of the 2021-22 budget (ES22) pointed to strong signs of recovery with better prospects of stabilization during FY23. After a 7.3 percent contraction in 2020-21, the economy is poised to grow 9.2 percent in 2021-22. GDP growth in 2022-23 is expected to be between 8 and 8.5 per cent depending on how the disruptions from the ongoing Covid-19 unfold. The sectoral breakdown of growth for FY22 looks broad-based. Agriculture is expected to grow by 3.9 percent, industry by 11.8 percent and the service sector by 8.2 percent. Compared to the average proportion of manufacturing GVA of 16.3 percent, it fell to 14.4 percent in FY21, which is expected to be 15.3 percent in FY22. It clearly radiates that the agricultural sector has also been supportive in the past two pandemic years with sustained growth. Many other sectors have shown resilience and even some have thrived during the pandemic – possibly pharmaceuticals.
Sectoral Pain Points:
The most affected sectors, including MSMEs, have struggled as they have not been able to fully access the reliefs designed for the sector. Service sectors such as commerce, transportation, tourism, retail, hospitality, entertainment and recreation, and many other high-touch, high-touch activities still squirm in pain as repeated virus waves strike them with sporadic adversity. The lack of growth in these human-intensive activities has impacted the livelihoods of the people who depend on these sectors. They continue to suffer despite compatible relief measures being devised for them and RBI providing liquidity to the sector. Roadside – Street vendors whose shops have been closed and many of them have not yet been able to reopen are in dire straits. The PM SVANidhi scheme was designed to provide them with a loan of Rs. 10000 to resume their activities but has yet to rehabilitate them.
The cumulative impact of the service sector’s woes caused its GDP share to fall to 53 percent from 55 percent in 2019-20 and is likely to revert to pre-Covid-19 pandemic levels in the next few quarters when the third wave that does not disrupt economies to an extent that had hit them during the first and second waves. The government has been careful to reach out to vulnerable and outreach sectors that may soon improve the situation. The service sector also includes information and communication, financial, professional and business services that need to be revitalized and expanded.
Funding to revive the economy is essential, but bank credit has not recovered. It’s still in the 7 percent year-on-year (YOY) range. Even the Emergency Credit Line Guarantee Scheme (ECLGS) limit of Rs 4.5 trillion (up from Rs 3 trillion) has not been used. The sanctioning of loans under the scheme stands at Rs 3.1 trillion based on the latest data. That relief has yet to reach eligible entrepreneurs as demand may now rebound.
But one of the good things about it is improving the health of the banks. The gross non-performing advances (GNPA) ratio (ie GNPAs as a percentage of gross advances) and the net non-performing (NNPA) ratio of Scheduled Commercial Banks (SCBs) have continued to decline since 2018-19. The SCBs GNPA ratio decreased from 7.5 percent at the end of September 2020 to 6.9 percent at the end of September 2021. The SCBs’ NNPA ratio also declined from 6 percent at the end of 2017-18 to 2.2 percent at the end of September 2021. SCBs’ capital to risk-weighted assets (CRAR) ratio increased from 15.84 percent at the end of September 2020 to 16.54 percent at the end of September 2021 on improvements at both public and private banks. Now the banks are in a better position to revive lending to speed up the disbursement of loans to sectors in need.
Improved tax performance due to the significant growth of various sectors led to an increase in collections of important direct and indirect taxes. The average monthly gross GST collection for the third quarter of the current year was Rs 1.30 lakh crore, higher than the average monthly collection of Rs 1.10 lakh crore and Rs 1.15 lakh crore in the first and second quarters respectively.
The ES22 found that against the backdrop of recovering economic sectors, fiscal stimulus is able to provide enough fiscal space to maintain government investment spending growth momentum while reaching the budget deficit of 6.8% of GDP projected for 2021-22. On the fiscal side, the main concern now is to calibrate a reduction in the general government debt-to-GDP ratio, which is estimated to reach 90% in 2021-22. This results in improved committed expenses due to interest payments relative to revenues.
Capital expenditure, as measured by gross fixed capital formation (GFCF), is expected to post strong growth of 15 percent in 2021-22 and achieve a full recovery to pre-pandemic levels in the next fiscal year. Private consumption is poised for a stronger recovery with swift vaccine coverage and faster normalization of economic activity. Government consumption is estimated to grow by a strong 7.6 percent, exceeding pre-pandemic levels. Private consumption is also estimated to have improved significantly, recovering 97 percent of the corresponding pre-pandemic production levels. With budget support, stimulus packages, loans, restructuring facilities and other political aid measures finding their way, growth is expected from all sides. Improved revenues could see the fiscal deficit end at 6.96 percent in the current fiscal year.
The ES22 points to risks in global commodity prices, which may impact the domestic economy, amid broader optimism. The ongoing pandemic and its future impact along with the prevailing uncertainty and the downside risks ahead have been discussed to provide guidance to the industry as a whole. The growth forecast of the high-frequency indicators reflects the resilience built in by extensive structural and procedural supply-side reforms that need to be worked on. The Union Budget – FY23 aims to create a growth-oriented ecosystem to build on evolving strengths while prioritizing relief to revitalize the high-contact industry at a faster pace.
The challenges of sustaining investment growth, fiscal prudence and resource allocation efficiency require a granular operation of the fiscal algorithm to ensure that the momentum gained so far is accelerated in the end while managing the looming risks. Some of the nuances could be the process of continuing financial sector reforms in the area of privatization of state-owned banks/insurance companies.
The views expressed above are the author’s own.
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