Growth of the Indian economy will get adversely affected in 1QFY22 due to COVID’s second wave. Analysts have started revising their earlier FY22 growth forecasts downwards. While the IMF (23 March 2021) was the most optimistic in terms of India’s FY22 growth prospects projecting it at 12.5%, the RBI (7 April 2021) considered 10.5% to be feasible. S&P in its recent release (5 May 2021[1]), considered a feasible growth range of 8.2% and 9.8% under their severe and moderate impact scenarios. Moody’s (11 May 2021[2]) projected India’s FY22 growth at 9.3%. In the context of the ongoing uncertainty about the full impact of COVID’s second wave, a benchmark growth rate of 8.7% may be considered relevant. If at least this growth is protected, India’s FY22 GDP at 2011-12 prices would be at the same level as in FY20, that is, INR145.7 lakh crore. Policy effort should be made to protect at least this level of growth.
There is clearly a trade-off between the duration and coverage of the lockdowns on one hand, and the erosion of growth on the other. The more extensive the lockdowns, the larger would be the loss in GDP growth. Although COVID-19 has now started affecting rural areas, we anticipate that agricultural growth would remain broadly intact. Further, the maximum impact of the lockdown would be in 1QFY22 and if vaccination gathers pace June 2021 onwards, the damage to the economy in the second and subsequent quarters can be contained. The worst affected sectors are likely to be the same as in FY21 namely, construction, trade, transport, hotels et.al., followed by manufacturing and mining. The public administration, defence and other services sector had also faced a contraction of (-)4.1% in FY21. Suitable policy intervention in 1QFY22 can ensure that this sector does not contract. This would require frontloading of government’s budgeted FY22 expenditures particularly the capital expenditures.
Recalibrating budgetary aggregates amidst COVID-19 second wave challenges
We recognize that the fiscal arithmetic of Center’s FY22 budget may get disturbed with the erosion of real and consequently nominal growth rates. The real GDP in FY21 had fallen to INR134.1 lakh crore, implying a contraction of (-)8.0%. The corresponding nominal GDP was INR195.9 lakh crore. The nominal GDP growth also requires to be revised downwards in FY22. Assuming a real GDP growth of 8.7% and an implicit price deflator (IPD) based inflation of 3%, the FY22 nominal GDP growth may be close to 12%. This is premised on IPD-based inflation remaining lower than the CPI inflation of about 4.5%, as has been the trend in recent years. The budgeted FY22 nominal growth was 14.4%. The budgeted buoyancy for Center’s gross tax revenues (GTR) at 1.2 may also not hold. We consider a buoyancy of 0.9, which is the average for the five years preceding the COVID year that is FY21, to be more realistic. A combination of a nearly 12% nominal growth and a buoyancy of 0.9 would result in a growth of 10.7% in Center’s GTR. This would imply a shortfall in Center’s budgeted net tax revenues of about INR0.8 lakh crore in FY22.
Budgeted magnitudes for non-tax revenues and non-debt capital receipts at INR2.4 lakh crore and INR1.9 lakh crore respectively may also need to be revised downwards. In these cases, the budgeted growth rates were 15.4% and 304.3% respectively. The excessively high growth for the non-debt capital receipts was premised on implementing an ambitious asset monetization and disinvestment program. The COVID-disturbed year may make achieving these targets extremely difficult.
The budgeted growth in non-tax revenues is largely dependent on an assumed growth of 60% in revenues from communication services and of 44.1% in dividends and profits from non-departmental undertakings. We consider that a shortfall of INR1.5 lakh crores in non-tax revenues and non-debt capital receipts together with a shortfall of nearly INR0.8 lakh crore in Center’s net tax revenues may lead to a total shortfall of INR2.3 lakh crores in the total non-debt receipts. This, together with the lowering of the nominal GDP as compared to the budget assumptions, may imply a higher fiscal deficit at 7.9% of GDP, a slippage of 1.1% points from the budgeted fiscal deficit at 6.8% of GDP in FY22. We consider it desirable that total budgeted expenditure should not be compressed so as to support demand although expenditure should be reprioritized strongly in favour of augmenting health expenditure and health infrastructure. The Center’s capital expenditure provision for the department of health and family welfare was quite low at INR2,508.7 crores for FY22. This requires to be enhanced substantially. Building hospital capacity perhaps at every district headquarter may not only cover for the current deficiency in hospital beds but is also likely to increase construction activities and absorb a lot of currently unemployed migrant labour. This may aid India’s post COVID-19 recovery.
Inter-state spread of COVID-19 and impact on Indian economy
Chart 1 shows the shock caused by corona’s second wave because of the speed and sharpness of its upsurge. When the first COVID-19 wave subsided, the confirmed monthly cases were limited to only 0.35 million in February 2021. This number shot up to 6.94 million in April 2021, throwing out of gear, India’s health infrastructure.
