Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A year of cautious optimism on economic front

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Gross fixed capital formation

Mains level : Paper 3- Year of economic consolidation

The article argues that we are less likely to witness high growth next year rather it is going to be the year of consolidation.

Year of consolidation

  • The Economic Survey, the Union budget, and the RBI credit policy attest that the economy is on the recovery path.
  • The fourth quarter will register a positive growth rate, and as a consequence, the contraction for the full year will be between 7.5-8 per cent.
  • The contraction sets the pace for growth in 2021-22 which is now going to be critical as it is the foundation for the fructification of the budget revenue targets.
  • But consider this: GDP in 2019-20 was Rs 146 lakh crore, which has come down to Rs 134 lakh crore in 2020-21.
  • Hence, a 10 per cent growth will take the Indian economy to Rs 147 lakh crore — when compared to Rs 145 lakh crore, this reflects modest growth.
  • Therefore, expectations should be tempered when we talk of growth next year.
  • There will be a revival in economic activity on all ends which will probably bear fruit in 2022-23 — FY 2021-22 will be a year of consolidation.

Policy architecture

  • The government has brought in a cogent policy framework right from the time of the Atmanirbhar announcements, culminating in the budget.
  • There is a focus on infrastructure as well as providing incentives to investment through the Production Linked Incentive (PLI) scheme.
  • Real estate, power and construction saw several policy reforms last year.
  • There is a strong capex push by the government and there will more action taken here.

RBI policies

  • The RBI has promised to continue accommodative policies, which sends a signal of managing liquidity considering the large borrowing programme of the government of Rs 12.8 lakh crore.
  • RBI will carry out more open market operations, and long-term repo operations during the year to ensure that interest rates remain stable.
  • However, there will be concern around state government borrowings too, which will exert pressure on the availability of funds.
  • Hence, there will be more central bank intervention in the market to ensure that funds are available.

Inflation concerns

  • Inflation is a concern as global commodity prices have already started going up and this has led to core inflation rising.
  • Given that the monsoon has been good in the last four years, there is a possibility of an adverse season this time which can affect food prices. 
  • In India, too, we have seen that the price of petrol and diesel is rising sharply.
  • Add to this rising manufactured goods inflation witnessed of late, and there is a possibility of inflation rising above the MPC’s tolerance levels.

Lack of consumption growth

  • For growth to take place, consumption growth has to be real and rapid.
  • Consumption growth has been affected by the absence of commensurate job creation.
  • Consumption growth is unlikely too soon as consumption is dependent on job creation.
  • Jobs get created when growth is high and hence there is circular reasoning here.
  • Income has been affected in 2020 due to the pandemic which has led to job losses as well as salary cuts.
  • This has affected the sustainability of the pent-up demand seen in October and November.

Falling investment

  • Investment has lagged with gross fixed capital formation falling to a low of 24.2 per cent in 2019-20 from 34.3 per cent in 2011-12.
  • Reversing this decline will be challenging because the demand for such projects has slowed down and banks have been wary of lending for infrastructure.
  • There is also surplus capacity in industry with the capacity utilisation rate being 63.3 per cent in the second quarter of 2020-21.
  • Therefore, private investment will rise only gradually and the onus is on governments to manage their targets.
  • Private investment will follow, but at a slower pace and realistically speaking, will fire more in 2022-23 rather than 2021-22.

Consider the question “Growth has to be driven by two engines- consumption and investment. India has been facing challenges on both fronts. In light of this, suggest the measures India needs to adopt to move forward on both fronts.

Conclusion

The year 2021-22 will be one of cautious optimism. Growth will trend upwards, but it has to be interpreted with caution, keeping a check on the consumption while pushing the investment while arresting the inflation.

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