Context

The adverse effect of the third wave of COVID-19, which is mainly affecting the last quarter of 2021-22, may call for a further downward adjustment in the growth rate to about 9%.

Growth in FY 2021-22

•  As per the NSO’s advance estimates, at the end of 2021-22, the magnitude of GDP in real terms is estimated at INR₹147.5-lakh crore that is only a shade higher than INR₹145.7-lakh crore in 2019-20.
• Thus, due to the three waves of COVID-19 that India has experienced, two years of real growth in economic activities have been wiped out. 
• As per the advance estimates, the gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in 2021-22.
• Capacity utilisation in India continues to have considerable slack.
• Private final consumption expenditure (PFCE) also shows a low growth of 6.9% in 2021-22.
• Any pick-up in demand would continue to be constrained by low-income growth in sectors characterised by a high marginal propensity to consume (MPC) such as the trade, transport, et al. sector and the Micro, Small and Medium Enterprise (MSME) sector more broadly.
• It may thus be prudent to expect a real GDP growth in the range of 6%-7%.
• Growth in 2022-23 would also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products.
• Growth in 2022-23 would depend on the basic determinants such as the saving and investment rates in the economy.

Suggestions

• Extend GST compensation period: The GST compensation provision would also come to an end in June 2022.
• This would cause a major revenue shock at least for some States such as Tamil Nadu, Kerala and Andhra Pradesh.
• While this matter may be considered by the GST Council, the compensation arrangement should be extended by two years in some modified form.
• With respect to non-tax receipts, the scope of the National Monetization Pipeline (NMP) may be extended to cover monetisation of government-owned land assets.
• Disinvestment initiatives may have to be accelerated.
• Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand.
• Urban counterpart to MGNREGA: Since consumption demand remains weak, some fiscal support in the form of an urban counterpart to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may be considered.

Focusing on fiscal consolidation

• It would be appropriate now to consider a graduated return to fiscal consolidation while using fiscal policy to lay the base for faster growth in the years to come.
• The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% of GDP for 2022-23.
• In their pessimistic scenario, it was kept at 6% of GDP. 
• It may be prudent to limit the reduction in fiscal deficit-GDP ratio to about 1% point of GDP in 2022-23.
• This would imply a fiscal deficit in the range of 5.5%-6% of GDP.
• From here on, a stepwise reduction of 0.5% points per year would enable a level of about 4% of GDP by 2025-26.
• By this time, as suggested by the Fifteenth Finance Commission, a high-powered inter-governmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and state governments.

Conclusion

Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand while aiming for the gradual return to the fiscal consolidation.

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