Macroeconomic Aspects of Indian Economy

1. Economic Backdrop: Deceleration of Growth

The Indian economic growth has declined from 8.1% in first quarter of 2018 to 4.5% in the third quarter of 2019. On the positive side, this could be viewed against the growth of global output that was estimated at 2.9% in 2019 by the World Economic Outlook published by the IMF¹ that has declined from 3.6% in 2018. Notably, the global output growth has been recorded the lowest since the global financial crisis of 2009 which emanated from the large-scale decline in industrial and trade activities.

In India, the deceleration of GDP growth, on demand side, has been caused by a slump in the growth of real fixed investment in first half of 2019-20 in comparison to 2018-19. This was so, partly because of the sluggish growth of real consumption expenditure. In fact, private capital expenditure for second quarter of 2019-20 has recorded its lowest growth in last one and half decade. Poor rural demand has been the major factor for this low consumption. This was in addition to the distressed rural economy which had been confronting unemployment, low productivity, poverty, infrastructure deficiency and poor delivery of basic services.

On the supply side, all sectors contributed to the deceleration in GDP growth in the first half of 2019-20. These sectors exclude “Agriculture and Allied activities”, “Public Administration”, defense and other services whose growth in first half of 2019-20 was higher than in the second half of 2018-19. A contrast is presented by the industrial output which recorded only 1.1% growth in August, 2019 the lowest in the last eighty months.

2. The Viewpoint: Three Prominent Themes

Against the backdrop, the FM initiated the operative part of the budget speech by acknowledging the two cross-cutting advancements, i.e.:

1. Explosion of technologies, especially analytics, artificial intelligence, robotics, machine learning, bio-informatics; and
2. Highest number of people in the age group of 15–65 years.

The first part of the budget has been woven around three prominent themes:

• Firstly, “Economic Development” for all to reiterate “Sabka Saath, Sabka Vikas, Sabka Vishwas”;
• Second, “Aspirational India” to enhance living standards which include education, health, and livelihood for all;
• Third, “Caring Society” for humanity and compassion.

In other words, FM emphasised “ease of living” to all citizens in a corruption free, policy driven system of governance.

3. Programmes and Plans: 16 Action Points for Agriculture and Rural Development

With these laudable goals, the FM made a number of policy announcements. These have been similar to the policy prescriptions used to be made in the “five year plan” prepared by the erstwhile “Planning Commission” duly approved by the “National Development Council” which has been disbanded and substituted with Team India.

The FM while reiterating the goal of doubling farmers’ incomes by 2022, laid emphasis on Agriculture, Irrigation and Rural Development. The following 16 action points were indicated as the focus:

1. Encouraging State governments to implement model laws:
   • Model Agricultural Land Leasing Act, 2016;
   • Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017; and
   • Model Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act, 2018.
2. Water-stressed districts: Comprehensive measures for one hundred water stressed districts.
3. PM-KUSUM Scheme: Expansion of PM-KUSUM scheme to provide two million farmers for setting up stand-alone solar pumps and enabling farmers to set up solar power generation capacity on their fallow/barren lands.
4. Balanced fertilizer usage: Balanced use of all kinds of fertilizers including the traditional organic and other innovative fertilizers.
5. Warehousing VGF: Viability Gap funding for setting up of efficient warehouses at the block/taluk level.
6. Village Storage Scheme: Village Storage Scheme to be run by the Self Help Groups (SHGs).
7. Kisan Rail: Setting up a “Kisan Rail” with refrigerated coaches through PPP arrangements.
8. Krishi Udaan: Krishi Udaan by the Ministry of Civil Aviation on international and national routes.
9. Horticulture cluster basis: Supporting States adopting a cluster basis to focus on “one product one district” in horticulture sector.
10. Integrated farming systems: Expansion of integrated farming systems in rain fed areas.
11. e-NWR & e-NAM: Integration of financing on Negotiable Warehousing Receipts (e-NWR) with National Agriculture Market (e-NAM).
12. NABARD re-finance & KCC: Expansions of NABARD re-finance scheme and coverage of all eligible beneficiaries of Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) under the Kisan Credit Card (KCC) scheme.
13. Artificial insemination & milk processing: Coverage of artificial insemination from the present 30% to 70% and doubling of milk processing capacity from 53.5 million MT to 108 million MT by 2025.
14. Marine fisheries: Development, management and conservation of marine fishery resources.
15. Fish production expansion: Raising fish production to 200 lakh tonnes through involvement of youth.
16. Deen Dayal Antyodaya Yojana: Expansion of SHGs under Deen Dayal Antyodaya Yojana.

4. Sectoral Budget Allocations and Social Infrastructure

Although, there are number of action points on Agriculture, Irrigation and Rural Development but the budgeted allocation of Rs. 2.83 lakh crore is only slightly higher by 13.2% than the revised estimates of the previous year.

Under wellness, water and sanitation, viability gap funding (VGF) has been provided for setting up hospitals in PPP mode. Eradication of Tuberculosis by 2025 has also been announced. Total allocation for Swachh Bharat Mission and Jal Jeevan Mission has been enhanced to Rs. 12,300 crore and Rs. 3.60 lakh crores respectively in 2020-21. New Education Policy will be announced soon, it has been stated.

Rs. 27,300 crore has been provided for the development and promotion of industry and commerce for the year 2020-21. Under the theme of economic development, the focus is on entrepreneurship and infrastructure to create employment opportunity for India’s youth.

Similarly, the focus under the theme of “caring society” has been on women & child, social welfare, culture and tourism and environment and climate change.

5. Expenditure on Major Sectors

Table 1 shows budget estimates of expenditure for 2020-21. Rs. 3,43,678 crore or 12.7% has been the increase over the Revised Estimates of 2019-20. The table shows major items of expenditure where variations have occurred.

Source: Budget at a Glance, 2020-21

Maximum increase of 217% can be noticed in “Communication” due to capital infusion in BSNL/MTNL for 4G spectrum, implementation of VRS and payment of ex-gratia for employees of BSNL/MTNL. The next highest increase is in Census, Survey & Statistics, i.e., 121%, for obvious reason to conduct population census by the Registrar General and Census Commissioners, India. Higher capital is needed for Road Transport, Railways & for infrastructure projects in pipeline, hence 16.5% increase over previous year can be noted.

This year, for the first time in the history of independent India, the Union Finance Commission has submitted an interim report only for a year, i.e. 2020-21. The report has been partially accepted and higher provision is made for post devolution revenue deficit grant, devolution for Panchayats and Municipalities, grants for State Disaster Response Fund, assistance to States from National Disaster Response Fund and releases of compensation to States for revenue losses on roll out of GST.

With the subdued demand in rural consumption, higher allocation to rural development and particularly to rural employment was expected. However, sharp decline of 13.4% over previous year in rural employment is seen due to lower requirement under Mahatma Gandhi National Rural Employment Guarantee Programme.

6. Fiscal Deficit and the FRBM Escape Clause

Due to significant shortfall in revenue collection particularly in GST, slippage in fiscal deficit target set in the budget estimate of 2019-20 was apprehended. As Table 2 indicates, the FM invoked “escape clause” in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and relaxed the fiscal deficit – GDP ratio by 0.5%, i.e. from 3.3% to 3.8% in the current year and 3.5% for the next year, though FRBM Act stipulates the necessity to return to the original target in the next year.

This has been due to three reasons:

1. Nominal GDP Growth Shortfall: The nominal GDP growth rate of 7.5% in the current year has been below the assumed rate of 12% in the budget of the previous year.
2. Widening Revenue Deficit: The revenue deficit–GDP ratio rose to 2.7% from 2.4% in the revised estimate of 2019-20.
3. Disinvestment Shortfall and Ambitious Target: The disinvestment target of Rs. 1.03 lakh crores as budgeted for 2019-20 could not be achieved. This estimate has been revised by bringing it down to Rs. 65,000 crores. Towards this, the FM announced a threefold increase of Rs. 2.1 lakh crore as disinvestment target. This includes divestment of government stake in public sector banks and other financial institutions including IDBI Bank and partial sale of its stake in Life Insurance Corporation (LIC), Air India and CONCOR for the year 2020-21.

Thus, fiscal deficit target of 3.5% of GDP for the year 2020-21 depends largely on disinvestment. With expansionary fiscal policy and high fiscal deficit there is also need to arrest the issue of slowdown.

Source: Budget at a Glance, Union Budget Documents 2020-21

Notes: *GDP for BE 2020-2021 has been projected at Rs. 224,894 billion assuming 10% growth over the estimated GDP of Rs. 204,422 billion for 2019-2020 (RE).
**Includes recovery of loans and disinvestments but excludes borrowings and other liabilities.

7. Conclusions and Policy Imperatives

The Finance Minister in her speech stated that “the fundamentals of the economy are so strong and that ensured macroeconomic stability.” However, in view of reduced growth, there is a need for further diagnosis of health of Indian economy so that more effort can be made to boost consumption, revive investment climate and increase exports. When the growth in economy is low there are constraints on resources and it becomes extremely challenging to achieve economic expansion. The economy has potential and reversal is only a matter of time and it is hoped that high rates of growth will be achieved sooner than later.