Economic Survey 2020: Growth projection of 6-6.5% looks reasonable in current scenario; effort should be there to garner revenue on tax front

The Economic Survey is important for three reasons. The first is that it indicates some critical bits of data. Second, it provides a view on some of the challenges that the country is facing. Third, there is a novelty item as the report is created by an economist. Let us see how these three elements have played out.

On the guidance front, the projection for Gross Domestic Product (GDP) growth is 6-6.5 percent which looks reasonable in today’s environment. There is an acknowledgment that the low base effect will provide the push; and more importantly, it quite correctly points out that the second half will be crucial as this is when the economy would turnaround. One is not sure if this is a hope or a certainty because it has been seen that the second half story plays out every year with the final outcome being quite disappointing. This number will be critical for the government as the Budget will be premised on this growth number as the denominator for the fiscal deficit ratio will be once again a double-digit number i.e. nominal growth of above 10 percent in GDP.

Here, the Survey points out two things. The first is that the government will have to go in for some expansion which it calls countercyclical step. Hence at a time when there is a private sector slowdown, the government must step in and spend. This can be an indication that a more aggressive position is taken on this fiscal deficit ratio tomorrow and the walk will not be towards the 3 percent mark and could go in the opposite direction. In this context, the Survey also correctly points out that the private sector investment will be subdued in the coming year and there is a chance of being overwhelmed by government investment in infrastructure.

Representational image. PTI

The Survey talks a bit on the Insolvency and Bankruptcy Code (IBC) too. This has been one success story for our economy in terms of policy. However, the Survey rightly points out that things need to move faster as banks are still undecided on how long it would take to resolve non-performing assets (NPAs) and the recovery rates that would ensue. This is one reason which has held back lending to the private sector projects. Now that the incremental NPAs have decreased, banks will be keen to see how this part progresses. Therefore, the IBC should take steps to expedite the cases which will also add weight to the ease of doing business endeavor.

On the policy front, the Survey is quite openly for limited government which has also been the stated policy of the Bharatiya Janata Party (BJP). There is talk of revisiting four major interventions which are Essential Commodities Act, drug control, food subsidies and loan waivers. Now it is not clear if the last two will be taken up in the Budget considering that when the economy does not do well, it is hard to rationalise subsidy or rule out waivers as this has become a perennial issue for all governments in power. The first two are easier to implement as the essential commodities act is quite outdated and drug control has come in the way of innovation. Hopefully, there would be some affirmative action here.

The Survey is also quite a votary of disinvestment and the view held is that there should be exits by the government in non-critical areas. It has suggested that a new body be created where the government ownership is passed on from where the independent management can take a call on disinvesting government stake. This seems to be a good indicator of what can be expected tomorrow and it is possible that the targets set for FY21 will be more aggressive as well as suggestive of the companies which will be considered for sale.

On the novelty element, the health card concept for non-banking finance companies (NBFCs) makes a lot of sense as the present crisis in the sector needs to be resolved not with just immediate solutions but also a roadmap for the future. What has been suggested is that the health card will actually give early warning indicators to the regulators on where trouble could be potentially brewing. This can be a major takeaway that will hopefully be formally implemented.

In short, the Survey is indicating that the government should focus on growth with firm expansion plans. A counter-cyclical approach is what is propounded here. At the same time, effort should be there to garner revenue on the tax front while being more open to disinvestment. Also, it points out that non-tax revenue (RBI surplus?) cannot always be relied upon to give increasing revenue. This will be challenging because while growth will be higher, it is more due to a base effect and a recovery only in the second half. There is some indication that the Monetary Policy Committee (MPC) should read inflation in a different manner and separate the temporary shocks from the more permanent ones. It will hence be interesting to see what Finance Minister Nirmala Sitharaman does tomorrow and the MPC on the 6 February.

(The writer is Chief Economost, CARE Ratings)