Union Minister for Finance recently presented the Economic Survey 2020-21 in the Parliament. The key highlights are as follows:
[1] Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis
- India focused on saving lives and livelihoods by its willingness to take short-term pain for long-term gain, at the onset of the COVID-19 pandemic
- Response stemmed from the humane principle that Human lives lost cannot be brought back
- GDP growth will recover from the temporary shock caused by the pandemic
- An early, intense lockdown provided a win-win strategy to save lives, and preserve livelihoods via economic recovery in the medium to long-term
- The strategy also motivated by the Nobel-Prize winning research by Hansen & Sergeant (2001): a policy focused on minimizing losses in a worst-case scenario when uncertainty is very high.
[2] State of the Economy in 2020-21: A Macro View
Growth and recovery
- COVID-19 pandemic ensued global economic downturn, the most severe one since the Global Financial Crisis
- The lockdowns and social distancing norms brought the already slowing global economy to a standstill
- Global economic output estimated to fall by 3.5% in 2020 (IMF January 2021 estimates)
- India adopted a four-pillar strategy of containment, fiscal, financial, and long-term structural reforms:
- India’s real GDP to record a 11.0% growth in FY2021-22 and nominal GDP to grow by 15.4% – the highest since independence.
- Agriculture set to cushion the shock of the pandemic on the Indian economy in FY21 with a growth of 3.4%
- Industry and services estimated to contract by 9.6% and 8.8% respectively during FY21
- V-shaped recovery is underway, as demonstrated by a sustained resurgence in high frequency indicators such as power demand, e-way bills, GST collection, steel consumption, etc.
External sector
- India remained a preferred investment destination in FY 2020-21 with FDI pouring in amidst global asset shifts towards equities and prospects of quicker recovery in emerging economies:
- Net FPI inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020, as investors’ risk appetite returned
Vaccination boost
- Economy’s homecoming to normalcy brought closer by the initiation of a mega vaccination drive
- India became the fastest country to roll-out 10 lakh vaccines in 6 days and also emerged as a leading supplier of the vaccine to neighbouring countries and Brazil
[3] Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa!
Growth causes debt to become sustainable in countries with higher growth rates; such clarity about the causal direction is not witnessed in countries with lower growth rates. Fiscal multipliers are disproportionately higher during economic crises than during economic booms.
Hue over debts
- Growth leads to debt sustainability in the Indian context but not necessarily vice-versa:
- Debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD), i.e., the difference between the interest rate and the growth rate
- Negative IRGD in India – not due to lower interest rates but much higher growth rates – prompts a debate on fiscal policy, especially during growth slowdowns and economic crises
- In India, the interest rate on debt is less than the growth rate – by the norm, not by exception
Policy goals
- Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity
- Fiscal policy that provides an impetus to growth will lead to a lower debt-to-GDP ratio
- Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios
- Desirable to use countercyclical fiscal policy to enable growth during economic downturns
- Active, counter-cyclical fiscal policy – not a call for fiscal irresponsibility, but to break the intellectual anchoring that has created an asymmetric bias against fiscal policy
[4] Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No!
- The fifth-largest economy in the world has never been rated as the lowest rung of the investment-grade (BBB-/Baa3) in sovereign credit ratings
- Reflecting the economic size and thereby the ability to repay debt, the fifth-largest economy has been predominantly rated AAA
- China and India are the only exceptions to this rule – China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3
No proper reflection
- India’s sovereign credit ratings do not reflect its fundamentals
- A clear outlier amongst countries rated between A+/A1 and BBB-/Baa3 for S&P/ Moody’s, on several parameters
- Rated significantly lower than mandated by the effect on the sovereign rating of the parameter
- Credit ratings map the probability of default and therefore reflect the willingness and ability of the borrower to meet its obligations
- India’s ability to pay can be gauged by low foreign currency-denominated debt and forex reserves
Transparency is inherent
- India’s fiscal policy reflects Gurudev Rabindranath Tagore’s sentiment of ‘a mind without fear’
- Sovereign credit rating methodology should be made more transparent, less subjective and better attuned to reflect economies’ fundamentals
[5] Inequality and Growth: Conflict or Convergence?
- The relationship between inequality and socio-economic outcomes vis-à-vis economic growth and socio-economic outcomes is different in India from that in advanced economies
- Both inequality and per-capita income (growth) have similar relationships with socio-economic indicators in India, unlike in advanced economies
- Economic growth has a greater impact on poverty alleviation than inequality
- India must continue to focus on economic growth to lift the poor out of poverty
- Expanding the overall pie – redistribution in a developing economy is feasible only if the size of the economic pie grows
[6] Healthcare takes centre stage, finally!
- COVID-19 pandemic emphasized the importance of the healthcare sector and its inter-linkages with other sectors – showcased how a health crisis transformed into an economic and social crisis
- India’s health infrastructure must be agile so as to respond to pandemics – healthcare policy must not become beholden to ‘saliency bias’
- National Health Mission (NHM) played a critical role in mitigating inequity as the access of the poorest to pre-natal/post-natal care and institutional deliveries increased significantly
Reforms are indispensable
- An increase in public healthcare spending from 1% to 2.5-3% of GDP can decrease the out-of-pocket expenditure from 65% to 35% of overall healthcare spending
- Emphasis on NHM in conjunction with Ayushman Bharat should continue.
- Telemedicine needs to be harnessed to the fullest by investing in internet connectivity and health infrastructure
[7] Process Reforms
- India over-regulates the economy resulting in regulations being ineffective even with relatively good compliance with the process
- The root cause of the problem of over-regulation is an approach that attempts to account for every possible outcome
- Increase in complexity of regulations, intended to reduce discretion, results in even more non-transparent discretion
- The solution is to simplify regulations and invest in greater supervision which, by definition, implies greater discretion
- Discretion, however, needs to be balanced with transparency, systems of ex-ante accountability and ex-post resolution mechanisms
- The above intellectual framework has already informed reforms ranging from labour codes to removal of onerous regulations on the BPO sector
[8] Regulatory Forbearance an emergency medicine, not a staple diet!
- During the Global Financial Crisis, regulatory forbearance helped borrowers tide over temporary hardship
- Forbearance continued long after the economic recovery, resulting in unintended consequences for the economy
- Banks exploited the forbearance window for window-dressing their books and misallocated credit, thereby damaging the quality of investment in the economy
- Forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, not a staple diet that gets continued for years
To promote judgement amidst uncertainty, ex-post inquests must recognize the role of hindsight bias and not equate unfavourable outcomes to bad judgement or malafide intent
- An Asset Quality Review exercise must be conducted immediately after the forbearance is withdrawn
- The legal infrastructure for the recovery of loans needs to be strengthened de facto
[9] Innovation: Trending Up but Needs Thrust, Especially from the Private Sector
India entered the top-50 innovating countries for the first time in 2020 since the inception of the Global Innovation Index in 2007, ranking first in Central and South Asia, and third amongst lower-middle-income group economies.
Need for thrust
- India’s gross domestic expenditure on R&D (GERD) is lowest amongst the top ten economies
- India’s aspiration must be to compete on innovation with the top ten economies
- The government sector contributes a disproportionately large share in total GERD at three times the average of the top ten economies
- The business sector’s contribution to GERD, total R&D personnel and researchers is amongst the lowest when compared to the top ten economies
- This situation has prevailed despite higher tax incentives for innovation and access to equity capital
- Indian resident’s share in total patents filed in the country must rise from the current 36% which is much below the average of 62% in the top ten economies
India’s business sector needs to significantly ramp up investments in R&D. For achieving higher improvement in innovation output, India must focus on improving its performance on institutions and business sophistication innovation inputs.
[10] JAY Ho! PM‘JAY’ Adoption and Health outcomes
PM Jan Arogya Yojana (PM-JAY) – the ambitious program launched by Government of India in 2018 to provide healthcare access to the most vulnerable sections demonstrates strong positive effects on healthcare outcomes in a short time.
The impact of PM-JAY on health outcomes by undertaking a Difference-in-Difference analysis based on National Family Health Survey (NFHS)-4 (2015-16) and NFHS-5 (2019-20) is following:
- Enhanced health insurance coverage: The proportion of households that had health insurance increased in Bihar, Assam and Sikkim from 2015-16 to 2019-20 by 89% while it decreased by 12% over the same period in West Bengal
- Decline in Infant Mortality rate: from 2015-16 to 2019-20, infant mortality rates declined by 20% for West Bengal and by 28% for the three neighbouring states
- Decline in under-5 mortality rate: Bengal saw a fall of 20% while, the neighbours witnessed a 27% reduction
- Birth Control: Modern methods of contraception, female sterilization and pill usage went up by 36%, 22% and 28% respectively in the three neighbouring states while the respective changes for West Bengal were negligible
- Low cost care: PM-JAY is being used significantly for high frequency, low cost care such as dialysis and continued during the Covid pandemic and the lockdown.
Overall, the comparison reflects significant improvements in several health outcomes in states that implemented PM-JAY versus those that did not.
[11] Bare Necessities
Access to the ‘bare necessities’ has improved across all States in the country in 2018 as compared to 2012
- It is highest in states such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura
- Improvement in each of the five dimensions viz., access to water, housing, sanitation, micro-environment and other facilities
- Inter-State disparities declined across rural and urban areas as the laggard states have gained relatively more between 2012 and 2018
- Improved access to the ‘bare necessities’ has led to improvements in health indicators such as infant mortality and under-5 mortality rate and also correlates with future improvements in education indicators.
What next?
- The thrust should be given to reduce variation in the access to bare necessities across states, between rural and urban and between income groups
- The schemes such as Jal Jeevan Mission, SBM-G, PMAY-G, etc. may design an appropriate strategy to reduce these gaps
- A Bare Necessities Index (BNI) based on the large annual household survey data can be constructed using suitable indicators to assess the progress on access to bare necessities.
