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EcoSurvey attributes ‘V’ shaped recovery to timely lockdown (Roundup)

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New Delhi, Jan 29 (IANS) The Indian economy is witnessing a ‘V’ shaped recovery due to a timely and stringent lockdown, and it is expected to grow at over 11 per cent in the next fiscal.

According to the Economic Survey 2020-21, which was presented in the Parliament on Friday by Union Finance Minister Nirmala Sitharaman, in contrast, the current fiscal will sustain the Covid-19 induced economic damage which is estimated to contract the GDP by 7.7 per cent.

The survey document, in its debt simulation for worst-case debt analysis, assumed a contraction of 7.7 per cent in 2020-21 and a growth of 11.5 per cent in FY22.

The projection on return of pre-pandemic growth is based on IMF projections of 11.5 per cent real GDP growth in 2021-22 and a 6.8 per cent growth in 2022-23. With these growth projections, India would once again return to become the fastest growing economy in the world.

However, the Indian economy will take at least two more years to return to the growth levels achieved in the pre-pandemic period, the Economic Survey said.

The survey, which has been prepared by the Chief Economic Adviser to the Finance Ministry, Krishnamurthy V. Subramanian, credited the ‘V’ shaped economic recovery to India’s timely and stringent lockdown to curb the spread of the Covid-19 pandemic last year.

Evidence from the experience of Spanish flu establishes that cities that intervene with lockdowns earlier and more aggressively experience stronger recovery in the economic front in the long run, it said.

“Learning from this experience, India implemented an early and stringent lockdown from late March to May to curb the pace of spread of Covid-19. With the economy brought to a standstill for two complete months, the inevitable effect was a 23.9 per cent contraction in GDP as compared to previous year’s quarter,” it added.

“Despite the hard hitting economic shock created by the global pandemic, India is witnessing a V shaped recovery with a stable macroeconomic situation aided by a stable currency, comfortable current account, burgeoning forex reserves, and encouraging signs in the manufacturing sector output,” the document said.

“India is reaping the ‘lockdown dividend’ from the brave, preventive measures adopted at the onset of the pandemic, which were based on the humane principle advocated eloquently in the Mahabharata,” it added.

As per the survey, the policy maturity and the alacrity displayed to not “waste a crisis” has helped the country save both ‘lives’ and ‘livelihoods’ in its own unique way and has shifted the focus away from the short-term pain created by the crisis to the potential for long-term gains engendered by the policy response.

Besides, the survey said that India requires an active fiscal policy which will ensure accrual of overall benefits from the Centre’s seminal economic reforms.

It cited that fiscal multipliers are disproportionately higher during the period of economic crises than booms.

“Thus, as the Covid-19 pandemic has created a significant negative shock to demand, an active fiscal policy can ensure the full benefit of seminal economic reforms taken by the government. As the IRGD is expected to be negative in the foreseeable future, a fiscal policy that provides an impetus to growth will lead to lower, not higher, debt-to-GDP ratios,” it said.

The survey examined the optimal stance of fiscal policy in India during a crisis and concluded that it is growth that leads to debt sustainability, and not necessarily vice-versa.

It noted that the phenomenon of a negative IRGD in India, unlike advanced economies, is not due to lower interest rates but much higher growth rates.

Consequently, the trend has prompted a debate on the saliency of fiscal policy, especially during growth slowdowns and economic crises.

Furthermore, the survey called the current fiscal deficit situation as transient with a rebound expected soon on the back of an economic recovery.

In the wake of the global pandemic outbreak, the general government (Centre plus states) is expected to register a fiscal slippage on account of the shortfall in revenue and higher expenditure requirements.

“This deviation from the path of fiscal consolidation may, however, be transient as the fiscal indicators may rebound with the recovery in the economy,” the survey said.

The central fiscal deficit in FY21 is expected to reach close to 6.8 per cent of the GDP, almost twice the budgeted levels of 3.5 per cent. The country has been missing FRBM targets on deficits year after year while the current situation and persistent slowdown has prevented even adherence to the glide path.

“The calibrated approach adopted by India allows space for maintaining a fiscal impulse the coming year. The growth recovery would facilitate buoyant revenue collections in the medium term, and thereby enable a sustainable fiscal path,” the survey said.

“The average Gross Fiscal Deficit Budget Estimate for States that presented their budgets before the outbreak of Covid-19 was 2.4 per cent of GSDP, while the average for budgets presented post-lockdown was 4.6 per cent of GSDP,” it added.

Additionally, the survey pointed out that the methodology for sovereign credit ratings should be made more transparent, less subjective and better attuned to reflect India’s economic fundamentals.

The survey document elaborated the discrepancies in India’s ratings vis-a-vis the past trends.

“Never in the history of sovereign credit ratings has the world’s fifth largest economy been rated at the lowest rung of the investment grade (BBB-/Baa3), except in the case of China and India,” the survey said.

The fifth largest economy has been predominantly rated as AAA, the only exception to this trend has been India and China, the survey said.

It said that India’s sovereign credit ratings have “no or weak” correlation with macroeconomic indicators.




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