Finance Minister Nirmala Sitharaman on Friday presented the Economic Survey that details the state of the economy ahead of the government’s Budget for fiscal year beginning April 1, 2021.
The Economic Survey 2020-21, authored by a team led by Chief Economic Adviser Krishnamurthy Venkata Subramanian, details the state of different sectors of the economy as well as reforms that should be undertaken to accelerate growth.
Here are the live updates:
Highlights of the Survey
V-shaped economic recovery due to mega vaccination drive, robust recovery in the services sector and robust growth in consumption and investment
V-shaped recovery is due to resurgence in high frequency indicators such as power demand, rail freight, E-Way bills, GST collection, steel consumption, Etc
India to become the fastest growing economy in next two years as per IMF
India’s GDP is estimated to contract by 7.7% in FY2020-21
Agriculture to clock 3.4% Growth, while industry and services to contract by 9.6% and 8.8% respectively this year
India to have a Current Account Surplus of 2% of GDP in FY21, A historic high after 17 years
Net FPI Inflows recorded an all-time monthly high of 9.8 Billion Dollars in November 2020
Scores of lives saved and V-Shaped Economic Recovery bear testimony to India’s boldness in taking short-term pain for long-term gain.
More allotment needed for health
Another pop culture reference from the CEA – this time it is Hindi movie 3 idiots, where one of the protagonists mothers speaks on how her sizable income goes to her husband’s medical needs.
An increase in public healthcare spending from 1% to 2.5-3% of GDP can decrease the out-of-pocket expenditure from 65% to 35% of overall healthcare spending, states the Survey.
Inequality and Growth: Conflict or Convergence?
This Chapter of the Survey deals with inequality and growth. Mr. Subramanian explains it with a story from Malgudi Days, the famous novel from R.K. Narayan which was later adapted into a TV series.
Both inequality and per-capita income (growth) have similar relationships with socio-economic indicators in India, unlike in advanced economies.
Economic growth has a greater impact on poverty alleviation than inequality.
India must continue to focus on economic growth to lift the poor out of poverty. Redistribution in a developing economy is feasible only if the size of the economic pie grows, says the Survey.
India’s Sovereign Credit Rating does not reflect its fundamentals
The fifth largest economy in the world has never been rated as the lowest rung of the investment grade (BBB-/Baa3) in sovereign credit ratings, states the Survey.
Credit ratings map the probability of default and therefore reflect the willingness and ability of borrower to meet its obligations.
India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history. The Survey recalls how India shipped gold to repay its debt.
India’s ability to pay can be gauged by low foreign currency denominated debt and forex reserves.
Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa!
That’s the second Chapter of the Economic Survey. Debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD), i.e., the difference between the interest rate and the growth rate.
In India, interest rate on debt is less than growth rate – by norm, not by exception, says the CEA.
Negative IRGD in India – not due to lower interest rates but much higher growth rates – prompts a debate on fiscal policy, especially during growth slowdowns and economic crises, he says.
Growth causes debt to become sustainable in countries with higher growth rates; such clarity about the causal direction is not witnessed in countries with lower growth rates, the Survey states.
Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity. Fiscal policy that provides an impetus to growth will lead to lower debt-to-GDP ratio. Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios.
COVID and economy
CEA K.V. Subramanian launches the Economic Survey app. This year’s Economic Survey is dedicated to COVID warriors, he says.
The first chapter of the Economic Survey speaks about India’s policy response to COVID-19 response, amidst a once-in-a-lifetime crisis.
India’s policy response guided by the principle advocated in Mahabaratha ‘Saving a life that is in jeopardy is the origin of dharma’. India recognised that the GDP growth will come back and it certainly has, but human lives will not, says Mr. Subramanian.
India’s policy response also derived from extensive research on epidemiology, especially that looked at Spanish Flu of 1918. One of the key insights was that pandemic spreads faster in higher and denser population and intensity of lockdown matters most at the beginning of the pandemic, he adds.
As per the survey estimates, India avoided about 37 lakh cases and about 1 lakh deaths through the policies it adopted.
Even without the lockdown, the economy would have significant economic impact. Strong correlation of lockdown with decline in cases and deaths is found across states, not just within a few states. Hence Economic Survey infers that lockdown had a causal effect on Saving Lives and Livelihoods.