The advance estimates put out by the national statistics office (NSO) and the third-quarter results emanating from the corporate sector paint a picture of cautious optimism. The key challenge for the finance minister is to strike a balance between supporting the growth by reviving the dormant private consumption and investment demands while containing the inflation.
According to the NSO, the real GDP in the year 2021-22 is expected to be Rs 147.54 lakh crore registering a growth rate of 9.2%. With this the economy has surpassed the pre-Covid levels. Except for the hospitality, transport, and other close contact-based services, all other sectors have surpassed the pre-Covid levels.
The service sector would have caught up, but for the third wave. The Purchasing Managers’ Index for services is back to pre-Covid levels. So is the case with the gross fixed capital formation (GFCF) – a broad measure of the total gross investment in the economy. The GFCF has increased to 32 percent of GDP in the 2nd quarter of 2021-22. Exports and imports have also registered high growth rates, so has the trade deficit. If the third wave is managed with minimum disruption to supply chains, the economy may register double-digit growth this fiscal.
The nominal GDP has sprung an even more pleasant surprise for the government. It is expected to grow almost at 18%, about 3.5 percentage points higher than the budgetary estimates. It is a good news for government on several counts. The revenue from indirect taxes depend on the nominal GDP. A higher growth for the nominal GDP means that the tax revenue is going to be much larger than expected. The direct tax revenue is also expected to be beyond budget estimates for this year. In higher tax revenue will help meet the revenue shortfall due to slow progress on the assets monetisation plans. With the help coming from National Monetisation Pipeline, the government may actually have additional fiscal space to meet the competing demands on the public exchequer.
The private final consumption expenditure, a measure of household spending and consumption, accounts for nearly 55% of GDP and is a significant component of the aggregate demand, which in turn is important for the growth prospects.
According to the NSO’s advance estimates for 2021-22, private final consumption expenditure, estimated at Rs 80.8 lakh crore for the fiscal year, remains about three percent below the Rs 83.2 lakh crore in the pre-pandemic year of 2019-20. Low private demand also gets reflected in the sales of tractors, two and three-wheelers.
The decline in the consumption expenditure cannot be fully explained in terms of an increase in the risk aversion among consumers in the aftermath of the pandemic. True, the lockdowns in the early months of the pandemic forced a cut on the household spending, pushing the overall savings to 21 percent of the GDP for the April-June quarter of 2020. However, since then, the saving rates have dropped significantly even with subdued demand, presumably on account of the stress in the informal sector.
A continued boost to public investment through the Gati Shakti is the way forward. Infrastructure investment has a significant multiplier effect on growth and jobs making the development inclusive. To attract private investments, incentives can be tied to job creation and apprenticeships. Extending the scope of schemes like production-linked incentives would help job creation through a vibrant manufacturing ecosystem. It will also help the major job creators, such as the MSMEs that are linked up and down the production chain.
The low levels of participation in the labour force, especially for women, requires serious attention. According to the latest data released by the NSO on the labour force participation, rate (LFPR) — the share of those working or seeking work in the age group 15-59 years —, the rate is almost back to the pre-pandemic levels. The push on infrastructure and the support extended to MSMEs have helped in reviving the employment prospects. However, the LFPR in India is very low, even compared to several other emerging economies. Women’s LFPR rate is much lower still. The problem is not new. The overall LFPR rate has remained low for decades.
In part, it is the result of poor job prospects fuelled by the low demand for labour and the attendant remunerative wages. The low quality of the skillsets of the Indian youth is the most crucial underlying factor. A big budgetary push is needed to invest in labour skilling, especially through the Skill India Mission. Besides, there is a case for extending the scope the existing credit line for MSMEs Inflation is another challenge. Retail prices have swelled nearly a tenth since the pandemic outbreak in early 2020.
This is partly due to a sharp rise in oils and other commodities prices. In part, it seems to be a consequence of reduced competition in various markets, owing to the distress among the micro, small and medium enterprises. This further underscore the need for strengthening of the MSMEs ecosystem.
The author is Director, Delhi School of Public Policy and Governance, and Professor, Delhi School of Economics.