A chance to support growth, fiscal consolidation

News: Recently, the National Statistical Office (NSO) released the first advance national accounts estimates for 2021-22.

 What are the growth prospects for India?

IMF and OECD forecasts have indicated growth rates at 8.5% and 8.1%, respectively, for 2022-23. However, these are optimistic as the base effects characterizing 2021-22 are limited.

However, India may expect real GDP growth in the range of 6%-7% only. The implicit price deflator (IPD) based inflation may come down to about 5%-6%.

What are the factors responsible for constraining the growth rate?

First, the basic determinants are the saving and investment rates in the economy. As per NSO, the gross fixed capital formation (GFCF) stands at 29.6% in 2021-22.

Second, there is inefficient capacity utilisation in India. NSO’s data indicate a capacity utilisation ratio of 61.7% on an average in the preceding four quarters. This delays recovery in private investment.

Third, there is a low growth of 6.9% in private final consumption expenditure (PFCE). Hence, high growth would be required for the sectors which are characterised by a high marginal propensity to consume (MPC). For example, trade, transport, and the Micro, Small, and Medium Enterprise (MSME).

Fourth, other issues are supply-side bottlenecks, high prices of global crude oil, and primary products.

What is the way forward?

First, the Government may consider extending the time limit for availing benefits. For example, extending concessional corporate income tax (CIT) rate of 15% for fresh investment and the extension of compensation arrangement under GST by two years.

Second, India needs to prioritize expenditure and should focus on reviving both consumption and investment demand. The National Infrastructure Pipeline (NIP) should be reassessed to make up for existing deficiencies. For example, the health sector.

Third, the scope of the National Monetization Pipeline (NMP) should be extended, and disinvestment initiatives should be accelerated to increase non-tax receipts.

Fourth, a high-powered inter-governmental group suggested by Fifteenth Finance Commission should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and State governments in the light of new realities.

Fifth, to improve consumption demand, urban counterpart to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) can be considered.

Source: This post is based on the article “A chance to support growth, fiscal consolidation” published in The Hindu on 24th Jan 2022.