Laying the foundation for faster growth

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Laying the foundation for faster growth

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• An extraordinary year: Year 2020 was the first year that saw an economic crisis triggered by a non-economic cause. The novel coronavirus pandemic brought everything to a standstill, and lockdowns hit hard. Recovery started as lockdowns went away.
• Where does Indian economy stand: Serious questions about economy's performance, policy actions needed, and possible road ahead, persist.

1. For 2020-21 H1, the GDP reduced by Rs.11.15 lakh crore compared to H1 of 2019-20 (at 2011-12 prices, constant), which is 7.66% of 2019-20 GDP.
2. If the trend persists in H2 also, then for entire 2020-21, GDP would reduce by less than 10% (compared to 2019-20).
3. If govt. expenditure picks up substantially, then only can H2 GDP pick up. Indicators like GST, coal and steel output and manufacturing output in October 2020 show that private sector is looking up.
4. Overall, everyone expected contraction of 10% of more, but it may be lower.

• What about 2021-22: If India grows at 8% then it will be back to where it was in 2019-20. So two years are cancelling each other out (if growth is 8%). Some sector can be lead engines of growth now, and govt. expenditure becomes relevant. 

1. IPOs of many private firms have been successful recently, though global trade growth remains uncertain.
2. Rich nations are struggling with Covid-19 till date, and rushing for vaccination.
3. Closing borders seems like a nice, safe solution temporarily, but kills growth all around.
4. Exports surge for India can push growth like nothing else. But India truly depends on domestic factors.
5. India's growth must be both consumption-driven and investment-driven. Only the latter will drive India in the long run, and that's what broken as of now.

• Monetary policy: The RBI was accommodative all along in 2020-21, with three elements - (i) lowering of interest rates via lowering of policy rates, (ii) more liquidity via new methods, and (iii) regulatory experiments like moratorium. As a result, Reserve Money went up by 15.3%, and money supply grew by 12.5% (some liquidity injection went into excess reserves). Inflation will remain high due to all this. Lesson is that apart for goods and services supply, inflation also depends on overall liquidity or money supply.
• Disappointing: The govt. expenditure under the head "Public admin, Defence and other services" remained low. It contracted in Q2 actually. Stimulus policy was supposed to arrest contraction, but fiscal deficit didn’t rise as expected (upto 8%, in reality upto 6%). But from here, govt. exp. must go up. 
• Capital expenditure: The key is govt's capital expenditure, which will stimulate growth. The Budget 2021-22 must have a detailed investment plan included, by the PSUs and Govt. departments.
• Growth and investment: From 2011 onwards, rate of investment kept declining. It well to 32.2% of GDP in 2018-19, from 38.9% in 2011-12. The 2019 sharp cut in corporate tax rate should spur investments, and overall climate must be improved. 
• NIP: The National Infrastructure Pipeline is a good idea, but the govt. must move on its own too, fast. But investment is not just about money, it needs social cohesion too. This is where politics has to play a positive role.
• Reforms: It is true that major reforms on labour and farming are needed, but timing is crucial for success. When the economy is on an upswing, then labour reforms work best.
• The $5 trillion goal: It is not possible to be there by 2025, but if India grows at 9% per annum from here onwards, then from $2.7 trillion in 2019, it can reach $5 tr by 2027. Jobs and employment will come from growth alone. It is time for the nation to focus on this single priority, leaving all else.

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