What GDP data says about state of economy, its influence on budget priorities

News: Both the first advance estimate (FAE) and the Professional forecasters’ survey, published by the Reserve Bank of India, estimate the Indian economy to expand at 9.2 per cent in 2021-22. 

There is also an expected sharp increase in nominal GDP, which is estimated to expand by 17.6 per cent this fiscal, much faster than the 14.4 per cent growth the Union budget had assumed. 

What has led to this rise? 

Double-digit wholesale price inflation and the persistence of high consumer price inflation have led to the surge in nominal GDP and added an upside to tax collections this year. 

But these estimates may often wary. 

What may be the reason for this variation? 

These estimates are based on the limited information available till December and can typically undergo a change when new information is available. 

Emergence of the Omicron variant– Although it is yet to be seen that how will it impact it will have on the overall economy, it has certainly injected some uncertainty in the fourth-quarter. 

The National Statistical Office also states that “the First Revised Estimates for 2020-21 (benchmark year), due for release on 31.01.2022, may also lead to a revision in growth rates reflected in FAE.” 

The budget next month will need a flexible approach to account for these uncertainties. 

What does the GDP data tell us about the state of the economy? 

Weak private consumption demand and weak consumer sentiment: The share of private consumption in GDP has been falling since the pandemic struck, and the latest RBI survey confirms the weakness. Budget needs to ensure that there is revival of consumption demand as it will lead to revival of investments. 

GDP in construction is barely above its pre-pandemic level, while trade, hotels, tourism and other contact-based services, which are also labour-intensive, lag the pre-pandemic levels. 

Omicron will again hit and delay the normalisation of employment in these segments. These activities are largely urban-centric and will likely need hand-holding from the budget. 

There has been a rising demand for the MGNREGA jobs which means a lack of rural employment opportunities. Additionally, rural wages for agriculture and non-agriculture have been very low in real terms. 

Weak tractor and motorcycle demand mirror the weakness in the rural economy.  

What must be budget priorities? 

The budget will need to extend support to rural areas till the situation normalises. 

Union Budget should also ensure that there is infrastructure-focused capital expenditure, as this has a higher multiplier effect on the economy and is known to crowd-in private investments. 

Note: Crowding in occurs when higher government spending leads to an increase in private sector investment 

Together with higher allocations, attention should also be paid to enhancing execution capacity. 

Fiscal policy (Budget) needs to play a supportive role while aiming for a reduction in deficits over the medium run.   

It also needs to ensure that the divestment targets are attainable as this it will improve the fiscal space for the government which it can use to support the economy.  

Source: This post is based on the article “What GDP data says about state of economy, its influence on budget priorities” published in The Indian express on 10th Jan 2022 

Print Friendly and PDF