With services sector not yet fully functional, consumption spending — private and government — continues to trend lower. However, capital formation did turn around in the previous quarter. It has reported an increase of 2.6% and can be largely attributed to large capital spending undertaken by Centre and States. The focus of the Budget too has been to revive investments which have seen a secular decline in the last few years. If the trend sustains, which it should given the multitude of production linked incentive schemes started by the government, it will increase India’s potential output and thus provide non-inflationary growth momentum to the economy.
An investment driven growth will also lead to job creation and thus support private consumption. An uptick in consumption implies higher GST collections and more jobs imply higher income tax collections. Thus government revenues can again grow in-line with nominal GDP growth
and thus give room to the government to reduce its fiscal deficit to 4.5% of GDP in FY26 from 9.5% of GDP this year.
CSO also revised the annual growth estimated for the financial year. The revised estimates have good news
as well as bad news.
The good news
is that GVA growth has been revised upwards to (-) 6.2% in FY21 from (-) 7.2% earlier. This is a reflection of improvement in economic activity since October 2020. Now the bad news. GDP growth has been revised lower to (-) 8% from (-) 7.7% earlier. This adjustment can be explained by the higher subsidy burden since the difference between GVA and GDP is net taxes adjusted for subsidy payments. In the Union Budget, the Centre increased the subsidy payout to Rs 5.95 lakh crore in FY21 from Rs 2.28 lakh crore in FY20.
I believe, the uptake from the growth numbers is two-fold. One, we are growing again which is good. Second, we can’t achieve our potential unless we vaccinate fast enough.
The author is Chief Economist, Bank of Baroda
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