India Ratings and Research (Ind-Ra) believes that the major focus of the government to revive the COVID-19 battered economy has till now been on the supply side, but it is high time to change gears and focus on the demand side as well, lest the ongoing recovery begins to lose steam. There is nothing wrong in addressing the supply-side issues, as it indeed was needed to restore/augment the broken supply chain, especially in an economy where micro, small and medium enterprises play an important role in terms of generating employment and output. However, the absence of adequate demand may jeopardise the recovery and may even lead to a second-round impact. Even if the supply side gets restored on account of the various measures announced by the government/the Reserve Bank of India (RBI), it may soon run into difficulty due to the lack of adequate demand for goods and services.
The economy has lately shown some
green shoots, and several high frequency indicators are reaching the pre-COVID
level of production, bolstered by a combination of festive season/pent-up
demand. However, after two consecutive months of positive growth, a
contraction in factory output (Index of Industrial Production) in November
2020 shows the fragility of the ongoing recovery. An appropriate demand-side
measure therefore is as important as supply-side measures.
Against this backdrop, Ind-Ra expects the FY22 Union Budget to focus on boosting aggregate demand, expenditure reprioritisation and mobilising higher non-tax revenue. Some of the specifics on which the government is expected to focus in the forthcoming budget are:
1. Spending on infrastructure especially that are employment intensive and have a shorter turnaround time;
2. Creation of development financial institutions on the lines of erstwhile Industrial Credit and Investment Corporation of India Limited, Industrial Development Bank of India and Industrial Finance Corporation of India, who bring in/have patient capital. However, such an institution needs to be created in a way that their operations are ring fenced and they function independently.
3. Continue with relief/income support to the households who are at the bottom of the pyramid;
4. Higher allocation to MGNREGS as it provided a safety net not only to rural households but also to the workers who migrated back to rural areas
5. More support to real estate given its backward-forward linkage in the economy especially affordable housing segment. Although a lot has already been done resulting in credit support to the developers and leading to the home loan interest rates falling to its lowest level in over 15 years, the scar is still visible and may require further support on the tax front for a specified period such as GST waiver for under-construction homes;
6. Micro small and medium enterprises continue to face headwinds in meeting their financing requirement. Hence, they would need and require government support to remain viable/afloat in FY22 as well;
7. Reprioritisation of both revenue and capital expenditure towards essentials, giving the top priority to mass vaccination/public health. Mass vaccination is important from the point of view that the current crisis did not originate from an economic/financial crisis and/or a natural disaster but is a health/medical issue. Therefore, fixing the health issue would itself fix many of the ongoing economic/financial issues and have a huge cascading effect on the economic recovery;
8. Besides reprioritisation of expenditure, rationalisation/discontinuation of schemes/sub-schemes that have meagre resource allocation and are non-impactful;
9. Mobilisation of higher non-tax revenue, much more than previous years, to fund expenditure. With equity markets at all-time high, this perhaps is the most opportune time to sell stakes in public entities. Although tax revenue is also expected to increase in FY22 on the back of an economic recovery, the real impetus to revenue receipts of the government can only come from the non-tax revenue; and
10. States must be given adequate
money and assured of union government support as and when needed, as most of
the spending happens at the state level.
In view of the above, Ind-Ra expects FY22 fiscal arithmetic to revolve around nominal GDP growth of 14.0% (real GDP growth of 9.5%-10% and GDP deflator growth of 3.6%-4.0%) and fiscal deficit at 6.2% of GDP.
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