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GDP growth, fiscal deficit: Economic Survey nos in line with expectations

On the fiscal deficit front, the likelihood of exceeding the budget estimate in FY21 was also expected in a pandemic-impacted year
Finance Minister Nirmala Sitharaman tabled the Economic Survey for 2020-21 in Parliament on Friday in the backdrop of coronavirus pandemic that brought all economic activity to a standstill for a few months in 2020, and saw the Indian economy sink into recession.

The key numbers were mostly in line with what most analysts / economists had forecast. Here’s a quick comparison of what they had expected versus the Economic Survey’s projections.

GDP growth

India’s economy, as per the Economic Survey, could contract 7.7 per cent in fiscal 2020-21, pulled down mainly by the coronavirus pandemic and the ensuing nationwide lockdown to contain the spread of the disease.

Real GDP growth, as per Economic Survey, could come in at 11 per cent in the next financial year 2021-22 (FY22). This is a tad lower than what experts had hoped for. Those at Nomura, for instance, pegged the real GDP growth higher than what the Economic Survey has projected.

“A combination of factors – the lagged impact of easy financial conditions, the ‘vaccine pivot’, and improving global growth prospects should lead to a strong growth outturn in FY22 (real GDP growth of 13.5 per cent, on our estimates). We expect the government to assume nominal GDP growth of 15 per cent y-o-y in FY22 (more conservative relative to our estimate of around 17 per cent) from -4.2 per cent y-o-y in FY21 (advance estimates),” wrote Sonal Varma, managing director and chief India economist at Nomura in a January 19 report co-authored with Aurodeep Nandi.

That said, the estimate is broadly in line with Reserve Bank of India's (RBI's) estimates, which had pegged the GDP contraction at 7.5 per cent in FY21 - up from its earlier forecast of a 9.5 per cent contraction.

Fiscal deficit

On the fiscal deficit front, the likelihood of exceeding the budget estimate (BE) in FY21 was also expected in a pandemic-impacted year.

“Keeping in view the concurrent demand of expenditure pertaining to the stimulus packages announced by the Government during the year to mitigate the impact of the pandemic and the anticipated revenue shortfall, it is expected that the fiscal deficit of the Central Government may overshoot its Budget Estimate for the current fiscal year,” the survey said.

Analysts at Barclays expect India’s consolidated fiscal deficit to reach 14 per cent of GDP (central: 7.7 per cent; state governments: 5 per cent; off-balance sheet items: 1.3 per cent) during FY 20-21, and decline only gradually over the next five years, with the government likely to prioritize reviving growth in the near-term.

“Relaxation in fiscal deficit targets may be necessary, and the government may have to revise the deficit target upwards for the current year in view of the dire need to augment capital expenditures. The Government should take a fresh look at the policy of fiscal deficit targets and allow for gentle increases in government borrowings to finance larger public investment and social expenditures,” said Dr. M Govinda Rao, chief economic advisor at Brickwork Ratings.

Divestment / Public sector undertakings (PSUs)

The survey has highlighted the need for revamping the Boards of Central Public Sector Enterprises (CPSEs), reorganize their structure, and enhance their operational autonomy coupled with strong corporate governance norms including listing on stock exchanges for greater transparency.

Going ahead, experts feel that the increase in public spending will have to be financed to a large extent by garnering disinvestment proceeds and monetizing assets.

“Calibrating a counter-cyclical fiscal policy requires fiscal expansion. The government’s measures are largely on the supply side to revive the investment climate by making the cost of borrowing low and saving more after tax profits for further investment. Now is the time for interventions on the demand side to increase consumption and investment demand. This would require an increase in public spending and new investments from public enterprises,” Govinda Rao adds.

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