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    VIEW: Signs of green shoots amidst contractionary growth prospects

    VIEW: Signs of green shoots amidst contractionary growth prospects

    VIEW: Signs of green shoots amidst contractionary growth prospects
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    By DK Srivastava   IST (Published)

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    These green shoots included improvement in manufacturing as reflected by PMI data which stood at 47.2 in June 2020, which is very close to the benchmark level of 50.

    Some important indications of recovery of the Indian economy became visible in the month of June 2020. These green shoots included improvement in manufacturing as reflected by PMI data which stood at 47.2 in June 2020, which is very close to the benchmark level of 50. GST collections also improved in June 2020. They rose to Rs 90,917 crores, which again, is close to the expected monthly benchmark of Rs 1,00,000 crores. IIP also improved to a level of 88.4 in May 2020 from 53.6 in April 2020.
    The Centre’s capital expenditure grew by 40.1 percent during 1QFY21 as compared to a contraction of (-) 27.6 percent during the corresponding period of FY20. This frontloading of the government’s capital expenditure augurs well for the National Infrastructure Pipeline (NIP). FPI inflows increased to US$3.4 billion in June 2020 as compared to outflows of US$1.0 billion in May 2020. Foreign exchange reserves peaked at US$516 billion as on July 10, 2020, rising from US$481 billion as on May 1, 2020.
    These signs of recovery are in direct contrast with the grim GDP growth forecasts for India for FY21 given by many multilateral institutions and rating agencies. These growth projections range from (-) 3.2 percent (World Bank) to (-) 9.5 percent (ICRA). The IMF projected India’s FY21 GDP to contract by (-) 4.5 percent, the ADB by (-) 4.0 percent, and the OECD by (-) 3.7 percent in its single-hit scenario.
    The government of India has recently supplemented its already announced stimulus expenditures by extending its existing PM Garib Kalyan Anna Yojana up to November 2020 from its earlier applicability until June 2020. This involves an additional expenditure amounting to Rs 90,000 crores, taking the overall size of the scheme to Rs 1.5 lakh crore from its earlier envisaged level of Rs 60,000 crores.
    India’s FY21 growth prospects remain open-ended and would depend on the calendar of control over COVID, the frequency and spread of the lockdowns, and policy options exercised during the remaining part of the fiscal year. Policymakers must not only overcome the short-term impact of the pandemic but also reverse the longer-term decline in the saving and investment rates.
    The recently proposed National Infrastructure Pipeline (NIP), if successfully implemented, may provide a solution to both the short-term and the long-term economic challenges. The investment schedule of NIP is such that investment, particularly investment in construction, peaks in FY21 and FY22. This would come in handy in uplifting the investment demand, employment and incomes. The multiplier associated with the construction sector, estimated at close to 3, will prove to be effective for this purpose.
    For this purpose, the centre may have to increase its fiscal deficit up to close to 7 percent of GDP in FY21 as an exception, and the states may be encouraged to borrow up to their enhanced borrowing limit of 5 percent of GDP for this year. Given the compulsions of the economy, some monetisation of the centre’s fiscal deficit may have to be permitted and recourse to additional borrowing from abroad may also have to be taken. While pursuing this path, care should be taken to keep inflation in check and limit the relaxation in fiscal deficit to not more than one to two years.
    In an interaction with the CII (27 July 2020), the RBI governor emphasised the role that infrastructure investment can play in reviving the Indian economy in FY21. He acknowledged the role of both the public and private sectors for infrastructure financing. In the first case, greater flexibility in setting the fiscal deficit limits for the central and state governments may be needed and in the second case, innovative market solutions may be called for. To finance public investment in infrastructure, the government may consider another round of fiscal stimulus focused mainly on increasing its capital expenditure on infrastructure.
    In the context of the ongoing pandemic, one development that has favoured India relates to the low level of global crude prices. The expectation was that this would benefit the users of PoL products particularly in the industry and transport sectors and the consumers. This expectation has so far been belied.
    The taxation of PoL products involves sharing the revenues from this important source between the central and state governments. Since both of these depend heavily on this revenue source given the subdued performance of GST, there has been a competition amongst them to increase the rates thereby keeping the retail prices of PoL products quite high in a year in which global crude prices have remained low. EY’s July 2020 issue of the Economy Watch provides a detailed perspective on this important policy issue. Retail prices of PoL products have a potential inflationary impact through transport and energy costs. In an international comparison of the burden of taxation on PoL products, India stands at the fifth-highest position among major economies after the UK, Italy, France and Germany.
    DK Srivastava is Chief Policy Advisor, EY India and former Director, Madras School of Economics. The views expressed are personal
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