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Economic Survey emphasizes the importance of fiscal policy to support resurgence, says CEA Subramanian

Updated : January 29, 2021 09:03 PM IST

Ahead of the Union Budget 2021, finance minister Nirmala Sitharaman has presented the Economic Survey for 2020-2021 in parliament.

The survey expects the Indian economy to grow by 11 percent in FY22 following a 7.7 percent contraction in the current fiscal.

It points out that a V-shaped recovery is underway owing to a resurgence in high frequency indicators such as power demand, rail freight and e-way bills among others.

The survey also bats for an active counter-cyclical fiscal policy saying that intellectual anchoring has created a bias against fiscal policy.

The survey argues that India's sovereign credit rating does not reflect its fundamentals, and that India is a clear outlier amongst countries on several parameters.

On the subject of regulatory forbearance, the survey says it should be treated as emergency medicine and not staple diet.

It adds that the continuation of forbearance has helped banks exploit the time-frame to window-dress their books damaging the quality of investments. It makes a case to discontinue forbearance at the first opportunity.

Healthcare has been a big focus area in the survey. It pushes for an increase in public healthcare spending from 1 percent to 2.5 to 3 percent of GDP.

It also bats for a regulator for the healthcare sector.

To decode the economic survey, Shereen Bhan spoke to chief economic adviser, Krishnamurthy Subramanian.

Subramanian said, "The survey is very clearly highlighting, using the example of what India did during the Asian financial crisis - the impact that it had on growth - the debt went up but the infrastructure spending that was done at that time and the reforms that were undertaken brought growth back to 8 percent and that growth in turn then brought the debt to GDP ratio down to about 70 percent from 83 percent."

"The survey also talks about the focus on the National Infrastructure Pipeline for two reasons - one because the spending in infrastructure crowds in private investment and fiscal multipliers are typically much larger during recessionary times and there is a very large literature in macroeconomics that actually highlights this and so India must follow the recommendations that is there in that literature."

"The economic survey is mentioning and emphasizing that till we get back to our pre-COVID growth path it is important for the fiscal policy to support the resurgence back into the growth path pre-COVID. So till that time fiscal support must continue. Once the pre-COVID growth path is achieved that would be the right time to consolidate and that is also an important aspect of any counter cyclical fiscal policy that when things start looking good the government must step back", he said.

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