Economic Survey suggests 2020-21 to be a challenging year, fiscally

Topics Economic Survey

Devendra Pant, Chief Economist, India Ratings
The Economic Survey (ES), tabled in Parliament a day before the presentation of the Union Budget, is a technocrat’s (chief economic advisor to the ministry of finance) assessment on the state of the economy. In the past, some suggestions made in the ES have found a place in the Union Budget, but the difficult ones have remained suggestions only.

Indeed the GDP estimation over the past few years have come under the lens of analysts/investors and led to some doubts about its veracity. Although establishing the credibility of data should be left to the data gathering/generating agency — National Statistical Office (NSO), the ES has used one full chapter to do so. The survey points out India’s GDP growth is estimated correctly. Using cross-country, generalised difference-in-difference fixed-effect model, the ES concludes lack of concrete evidence for incorrect estimation of GDP. This is based on analysis of new firm creation in the formal sector across 504 districts which suggests that a 10 per cent increase in new firm creation increases district-level GDP by 1.8 per cent and new firm creation in the service sector is much more than manufacturing, infrastructure or agriculture. Higher firm creation in the service sector is in line with the bigger share of the services sector in gross value added. The survey also suggests these pieces of evidence must be looked into by the standing committee on economic statistics, headed by former chief statistician Pronab Sen.

According to the assessment of the state of the economy, the ES expects real GDP growth in 2020-21 to improve to 6-6.5 per cent, from 5 per cent (as estimated by the NSO) in 2019-20. A 100-150 bp increase in real GDP growth in 2020-21 originates from its assumption of the government’s capacity to deliver on reforms, though important but may act as a stumbling block. One input from the ES, which could find a place in the Union Budget 2020-21, could be 6 per cent real GDP growth and around 3.8 per cent GDP deflator growth in 2020-21 leading to a nominal GDP growth assumption of around 10 per cent. The basic foundation of the Budget on the revenue side depends on nominal GDP growth and buoyancy of taxes. Any deviation from the growth and buoyancy assumption could lead to fiscal arithmetic going wrong, similar to the one likely to be witnessed in 2019-20.

The ES has already given sufficient indication that 2020-21 will be a challenging year, fiscally. It argues usage of counter-cyclical fiscal policy to boost demand, consumer sentiment and create fiscal space. In this regard, it recommends relaxation in the fiscal deficit from the fiscal consolidation roadmap. The 15th Finance Commission suggestions on tax devolutions will not only have an impact on Union's but also on states’ finances.

The ES stresses on enhancing trust by reducing information asymmetry and improving the quality of supervision. In a market economy, these two aspects are very important but much will depend on the effectiveness of the regulatory institutions. This also means more emphasis on entrepreneurship and wealth creation.

The survey is critical of government interventions in the market and shows four instances where government interventions failed to achieve the desired outcome.  These four areas are: Stock limits on commodities under the essential commodities Act, the regulation of prices of drugs, government intervention in the foodgrain market, and debt waivers given by the central and state governments.

To achieve a GDP target of $5 trillion by 2025, the survey suggests a strategy of ‘Assemble in India for the world’ to be integrated into ‘Make in India’. By doing this, India can increase its market share in global trade to around 3.5 per cent by 2025 and 6 per cent by 2030 and will create 40 million jobs by 2025 and 80 million by 2030.

Views are personal. Devendra Pant, Chief Economist, India Ratings

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