Former chief statistician Pronab Sen on Friday cautioned against any short-term obsession with fiscal conservatism as it would delay an economic recovery, keeping fiscal deficit at elevated levels for a much longer period, in turn, exacerbating the crucial debt-GDP ratio. Given the lower-than-expected fiscal stimulus rolled out so far, the Centre appears to be looking at the immediate deficit figure, while it should have acted with a long-term horizon, he said.
Making a case for more aggressive government expenditure at this juncture, Sen said the chances of a strong economic rebound in FY22 hinge on how the government firms up its Budget for FY22.
Sen was speaking at the Idea Exchange programme of the Indian Express Group, Sen said the Covid-19 may have caused an economic loss of Rs 18-20 lakh crore (or 9-10% of GDP) this fiscal from a year before; the household sector has borne the brunt, owing to wide-scale job losses.
If public spend (by Centre/states/PSUs) is not scaled up, GDP might shrink not just this fiscal but even in the second and third quarters of FY22 once the favourable base effect wanes. He believes private investments would recover at a much slower pace than consumption, as there is still huge idle capacity.
The fiscal impact of the measures announced so far by India make for just about 2% of GDP (about Rs 4 lakh crore) if all things go as planned, lower than the average of about 2.5% of GDP for similar-rated peers. Also, expenditure control measures being enforced are leading to considerable savings (an estimated Rs 4 lakh crore in April-December alone). It has been a massive expenditure rejig, rather than a big fiscal expansion.
The stock market boom, meanwhile, is triggered by the abundance of liquidity injection globally when the asset base for investments in the real economy has barely expanded. If a clutch of IPOs are announced, the Indian stock market may self-correct, Sen said. He, however, cautioned against unscrupulous elements that tend to proliferate during this period to take advantage of the boom.
Sen called for a more holistic reading of the perceived resurgence of rural India, which partly made up for the crisis in urban areas. Rural areas of only 6-7 states that rely less on remittances and have seen bumper rabi harvest are probably recording good FMCG or consumer durables sales; sales in the rest, mainly those that have seen a return of migrants, may still be faltering.
The surge in retail inflation while wholesale price inflation remains well within the comfort zone has brought to the fore the role traders play in the supply chain, Sen said. CPI inflation hit a 77-month peak of 7.61% in October and has remained above the Monetary Policy Committee’s tolerance band of 4 (+/-2)% for 10 of the past 11 months. However, wholesale price inflation has remained below 2% in recent months.
Sen feels while the MSME sector has proved its resilience in the past, it may take at least 1-2 years to return to normalcy this time around.