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Union Budget 2021 To Put COVID -19 Hit Economy On Track

The projected GDP growth does indicate that the worst is over, but it still does not indicate whether the economy has recovered the lost ground and surpassed it, seems that the economy will be able to just recover the lost ground in FY22 and surpass the FY20 GDP level in a meaningful way only in FY23.

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Before we set our expectation from the Union Budget 2021-22, let us look at the Global and Indian economic scenario which may have an effect in our major policy decisions. The Indian economy is sluggish but Sensex is booming, this may be due to market expectations of more government measures to speed up the economy. The Government in the ongoing slowdown had introduced a slew of measures to boost the economy and slashing corporate tax. Inflation in India is much higher compared to global level and it is a worrying factor. Moreover, bit coin market has increased to 300 percent globally amounting to a total of 700 billion bit coin in last 12 months which may challenge the reserve currency status of $ in the future and emerging as new gold for destination of investors. Weakening of $ may also result from printing of $ 5 trillion by Federal Reserve Bank. The interest rates have been much higher in India than the global market and therefore hampering consumer demand. Real Estate demand has been increasing because sellers are sitting on a high inventory and desperate builders are luring the buyers with freebies and low prices. The home loan interest also is at its lowest in almost two decades. The increase in dollar prices is having a bearish effect on commodities and, therefore unless the dollar prices drop the commodities prices will keep on increasing thereby slowing demand. The US printed around 5 trillion $ in order to counter the impact of Covid 19. The purpose was to drive down the interest rates and hope that people and businesses borrow and spend more and in the process revive the economy. The extent of downturn and the pace of recovery remain very extradonarily uncertain and a full recovery i.e. the V – shape recovery as predicted by several experts is unlikely to occur until people are absolutely confident that it is safe to re-engage in a broad range of business and economic activities.

India’s economy had been losing momentum even ahead of the shock delivered by the COVID-19 crisis. The rate of GDP growth dropped to a more than ten-year low of 4.2 per cent in 2019, down from 6.1 per cent the previous year. The pandemic bought an economic catastrophe for India. GDP in April-June was 23.9 per cent below its 2019 level, indicating that nearly a quarter of the country’s economic activity was wiped out by the drying up of global demand and the collapse of

domestic demand that accompanied the series of strict national lockdowns. And a 7.5 per cent decline in GDP in the following quarter pushed Asia’s third-largest economy into an unprecedented recession. The government’s spending plans particularly on infrastructure and social sectors as well as relief to sections of people hit by the pandemic and lockdown will dictate the pace of recovery. Though the deaths per million are significantly lower than in Europe and the US, the economic impact had been much more severe. There should be enough budget not only to purchase vaccines but also to ensure there is a proper transport chain and suitable storage facilities. There should be some budget for additional human resources who are trained as this is going to be a whole new exercise. Which means, the government will have to higher new vaccinator and staff and will have to pay their salaries. As restrictions were gradually lifted, many parts of the economy were able to spring back into action although output remains well below the pre-pandemic levels. While agriculture with bountiful harvest has been a driver of India’s economic recovery, the government’s stimulus spending in response to the COVID-19 crisis has been significantly more restrained than most other large economies. Finance minister Sitharaman announced a total stimulus package of Rs. 29.87 lakh crore, or 15 per cent of GDP. That equals the total spending envisaged in the government’s budget for the year to March. The limited cash spending was on account of the government not generating enough revenue to even pay states for their share of GST. Revenue collections were hurt by the lockdown.

Yet, high-frequency indicators, including exports, automobile sales, energy consumption and manufacturing output have shown an uptick, which may be an indication of a ‘V’ shaped recovery, i.e., a fast recovery.

Rating agencies and analysts have raised their expectations of GDP growth in January to March 2021 with RBI predicting a small positive growth in the January-March quarter. According to Dun & Bradstreet, only 30 per cent of active businesses in India were still disrupted at the end of November 2020 compared to 95 per cent in April 2020 when the nationwide lockdown was imposed.

“Continued government support will be crucial to sustain and propel growth momentum – which has picked up,” said Arun Singh, Global Chief Economist, Dun & Bradstreet. “During the first six months of the fiscal year (April to October 2020), government expenditure was 48.6 per cent of its budgeted estimate. We expect the remaining budgeted expenditure to be spend with other off-budget spending.”

This along with the execution of various policy initiatives will propel growth momentum in FY21. However, credit disbursement to the industry has not picked up yet and this remains a cause of concern. This does not bode well for the industry at a time when domestic demand has not yet stabilized and external demand remains weak.

India Ratings and Research (Ind-Ra) said policymaking is facing the twin challenges in collating reliable high-frequency data and interpreting the same as the impact of the COVID-19 pandemic is proving to be an unprecedented disaster. An appropriate understanding based on reliable data is critical to ensure effective policy intervention, it said, adding a low base in current fiscal will make even a moderate improvement in the first couple of quarters of next financial year as decent year-on-year growth.

The projected GDP growth does indicate that the worst is over, but it still does not indicate whether the economy has recovered the lost ground and surpassed it, seems that the economy will be able to just recover the lost ground in FY22 and surpass the FY20 GDP level in a meaningful way only in FY23.

Since the economic slowdown caused by the outbreak of the Covid-19 pandemic in India, there have been many demands from the government to announce a large

fiscal stimulus to stimulate the economy. Now, an important macroeconomic question arises, how to meet the huge additional expenditures as economic growth and tax revenues remain uncertain in 2020-21 making it challenging for the government to finance any addition to the fiscal deficit? Based on the assumption of certain percentage contraction in real GDP in 2020-21, and the same nominal expenditure of the Union government as stated in the 2020-21 budget estimates, we get a fiscal deficit of corresponding figure of the Union government. If we consider the alternative scenarios, then we get a range of fiscal deficit/GDP ratio, depending on the extent of tax revenue contraction. Increase in government spending beyond the levels already announced would then mean an increase in the fiscal deficit beyond the expected levels and it will be difficult to manage in the longer term. This may be financed either if disinvestment revenue turns out to be higher this year due to additional efforts made to sell off Public Sector Enterprises. Government's domestic borrowing has increased and the interest that the government pays to RBI on the bonds it holds will be higher. The present fiscal scenario will put pressure on the government and will be unable to meet its FRBM requirements. However, if the fiscal deficit is even higher and puts the government's debt trajectory on an unsustainable path, longer term considerations will come into play. Government may plan to manage the situation by borrowing to finance some of the essential budgetary schemes like Covid – 19 vaccination schemes or Pandemic related expenditures. These borrowings made by government may effectively become debt of the government and can be considered as extra budgetary borrowings and the government should be upfront about off-budget spending.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Dr. Karunakar Jha

The author is Professor, Department of General Management, School of Business, UPES

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Dr. Hiranmoy Roy

The author is Associate Professor, Department of Economics and International Business, School of Business, University of Petroleum and Energy Studies (UPES), Dehradun

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