The Economic Survey 2020-21, the annual flagship document of the Ministry of Finance, has presented a realistic assessment of the prospects of the economy in the upcoming financial year. The Survey expects India’s economy to grow at 11 per cent in 2021-22, in line with the International Monetary Fund’s latest assessment which pegs growth at 11.5 per cent. While this may turn out to be a conservative estimate — economic activities could gather momentum as the vaccination drive gains traction — a rapid rebound should not be mistaken for the economy coming out of the woods as the recovery continues to be uneven. But, even accounting for this revival, the economy will take almost two years to cross the pre-pandemic GDP level.
With the government’s approach in both — containing the pandemic and dealing with its economic fallout — coming under criticism, the Survey has mounted a forceful defence of the measures adopted. Marshalling evidence, by drawing on epidemiological and economic research, it estimates that imposing an early, stringent lockdown “restricted the COVID-19 spread by 37 lakh cases and saved more than 1 lakh lives”. On the policy response, while there was a strong argument for ramping up the scale and size of cash transfers to the vulnerable sections and greater government support to the economy in addition to the government’s approach of focusing on necessities — food, liquidity measures, and forbearance — the Survey has doubled down on the government’s conservative approach, arguing that given the supply side shocks, reflating the economy through government expenditure would have led to runaway inflation.
Notwithstanding that, the Survey has now come out strongly in favour of higher government spending. The arguments for doing so are overwhelming. With private investment likely to remain risk-averse, and considering that fiscal multipliers are higher during economic slowdowns, greater public spending can help crowd in private investments, give a fillip to growth, provided that the composition of expenditure pivots towards capital spending. This call for counter-cyclical fiscal policy should not be construed as a leeway for fiscal irresponsibility. While there are concerns over the sustainability of higher debt levels, the Survey notes that it is higher growth that provides the key to the sustainability of debt for India. Hopefully, this argument will translate into actual policy in the budget. As the Survey notes: “The risks from doing too little are much more than the risks from doing too much.”