In the near term, fiscal policy can play an important role by expanding fiscal space while fiscal deficit can be stabilized in medium-term.
The first advance estimates released by the National Statistical Office (NSO) showed that GDP in constant prices in FY 22 was 1.26 per cent higher than the pre-Covid year of FY20. In other words, India had a growth rate of 0.63 per cent per annum in the post-Covid period. Although the impact of Omicron is less on the economy, the loss of GDP in the last two years is high. Also note that the pre-Covid year FY20 had a low base with 4 per cent growth of GDP. Therefore, the need to focus on higher growth in the forthcoming budget and in the medium term, that is, beyond India@75, is obvious.
There are several challenges in creating quantity and quality of jobs in the economy: (a) Unemployment rate is high in both rural and urban areas; (b) decline in work participation rates, particularly for women; (c) recovery in employment is still below the levels of the pre-Covid period. According to CMIE, the employment in December 2021 was 2.9 million less compared to that of 2019-20; (d) 85 per cent of the workforce is still in informal sector; (e) less than 5 per cent of India’s workforce has formal skill training; (f) manufacturing and services need structural change; (g) focus on MSME sector is needed for higher employment.
There is a need to have policies in the forthcoming budget and in the medium term for achieving higher economic growth and jobs. Some of these policies are discussed below.
First, the last budget has given a push to capital expenditure and infrastructure. This has to be continued in the next budget and in the medium term. The government outlined an infrastructure project pipeline worth more than Rs 102 lakh crore and asset monetisation pipeline of Rs 6 lakh crore to be implemented in the medium term. Continuing focus on infrastructure and capex by the government is important as it is a key driver for the “future of India”. Of course, all these plans on infrastructure depend on effective implementation and creating appropriate models of infrastructure and also on generating the required finance.
Second, it is well known that rise in exports is one of the main engines of growth and also important for employment creation. Export growth in India has increased and is expected to reach $400 billion by the end of FY22. One worrying aspect of India’s export performance is the failure in expanding the share of labour intensive products in the export basket. In the post-Covid situation, there are several opportunities for India to occupy the space vacated by China to boost exports. However, one problem in recent years is that India’s trade policy has become more protectionist by increasing import tariffs. India should also join the Regional Comprehensive Economic Partnership (RCEP) for integrating our industries with the value chains in Asia.
Third, there is hardly any disagreement that India needs to aim at the larger growth of the manufacturing sector for higher economic growth and creating more productive jobs. However, the share of manufacturing in GDP and employment has hardly increased over time. Production Linked Incentive (PLI) schemes can improve performance. However, more efforts are required to improve the manufacturing sector. Similarly, there are a lot of opportunities for India in the service sector. The top global service brands like Google, Airbnb, Amazon, LinkedIn, McKinsey, Master Card, Visa, Fedex covering hospitality and consulting firms or food and beverages like Starbucks are from the US. Brand and customer centricity are important here. India can also think of more business in the service sector. Growing startups including unicorns in manufacturing and services is part of this effort.
Fourth, banking reforms are important as bank credit growth is a key indicator of economic growth. In the immediate term, interest rates may rise in India and at the global level due to rise in inflation. This may increase the cost of capital. Credit to GDP ratio in India is only around 55 per cent compared to 100 per cent and 150 per cent in many other countries. Credit should flow to all categories of economic agents like firms, households etc. It is true that bank credit growth increased to 9 per cent in December 2021. But, NPA is still a problem for Scheduled Commercial banks (SCBs) and others. The macro stress tests for credit risk mentioned in the Financial Stability Report released by the RBI “indicate that the gross non-performing asset (GNPA) ratio of SCBs may increase from 6.9 per cent in September 2021 to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario. SCBs would, however, have sufficient capital, both at the aggregate and individual levels, even under stress conditions”. The bad bank, a key initiative of the last budget, is yet to take shape. The role of fintech companies in the financial sector has increased significantly. They may not be able to replace banks although they are competing on payments. The banks also have to focus now on ESG (environment, social and governance) while giving credit. Big technology and digital push is also needed for banks.
Lastly, the K-shaped recovery of the economy is still continuing. A large part of the corporate sector has been able to manage the pandemic and the stock market is doing well. On the other hand, the informal workers, including daily wage labourers, migrants, MSMEs, the contact intensive sectors etc, have suffered a lot with the loss of incomes and employment. The policies have to focus on giving a push to the MSME sector, increasing investment in agriculture and rural infrastructure, a social sector push including bridging divides in health and education, social protection measures like foodgrain distribution, cash transfers, MGNREGA in rural areas, urban employment guarantee schemes etc. This will also create demand for the economy.
On economic growth and jobs, we have to double our efforts to cover the losses and reach a normal steady growth. The forthcoming budget and medium-term policies should focus on them. The goal of achieving a $5 trillion dollar economy by 2024-25 may get delayed by one or two years. The monetary policy is already very accommodative and this may not continue as there are headwinds like rising inflation. In the near term, fiscal policy has to play an important role in achieving the objectives of growth and jobs by expanding fiscal space while the fiscal deficit can be stabilised in the medium term. Increase in private investment may take some more time.