Chief Economic Advisor Krishnamurthy Subramanian expects spending along with rapid vaccination to boost GDP growth in the second half of the fiscal year.
He remains optimistic about the path of economic recovery. In an interview with Activity areaHe said he hopes the forecast for a normal monsoon will dampen food inflation further, but wants to remain vigilant for a few months.
RBI too, like others, lowered the growth projection to single digits. Are you still optimistic about double-digit growth as projected in the Economic Survey?
We went from an “unknown-unknown” situation (during the first wave – what to do) to “known-unknown” (during the second wave – how much to do). The blockages were asynchronous and heterogeneous in their timing. For example, in April only some states imposed restrictions, mainly Maharashtra. Then Delhi, Chattisgarh and Madhya Pradesh also opted for a foreclosure in April. In May, of course, the number of states requesting restrictions was much higher, which was also reflected in the high-frequency indicators. There has also been a drop in energy consumption and e-way bills, but they have since started to rise. So based on all of this, we had assessed that the impact is probably not huge. The ratings that came from the RBI are consistent with our own ratings.
The economic survey has highlighted health facilities and related issues for an individual. Today, the SBI released a report indicating that health spending will drop from 5% to 11% in terms of private final consumption expenditure. Will you propose policy prescriptions to reduce this cost and relieve individuals?
Health is a matter of state. Therefore, health spending, as a percentage of GDP, is something for states to look at because one of the key things we highlighted was that if, for example, overall health spending (public spending) , as a percentage of GDP increase from current levels to even 2.5 to 3 percent of GDP, the decline in personal household spending will be huge.
Remember the scene from the movie 3 Idiots, where Rancho and Farhan go to Raju’s for dinner? One of the key aspects of the scene is when Raju’s mother begins to complain about how her husband’s health expenses leave them with little to spend. on their own other consumer activities. This story actually played out depressingly in Wave 2, and as a result, states must immediately increase their spending on health care. Instead of giving gifts in the form of a television, the citizens of the state would benefit the most if those expenses were actually spent on health care.
Even the number of beds we have per capita is extremely low. USA has 34 beds for lakh population, Germany has 29 beds for lakh population, we have 2.3 beds for lakh population. However, it remains important for citizens to demand the rise in state health spending.
Considering the overhaul of the vaccine policy, the increase in expenditure on food subsidies, the increase in fertilizer subsidies and the possible increase in the MGNREGA allocation, do you estimate an increase in the budget deficit?
Immunization is really essential for the economy to regain its momentum for recovery. If you remember, until March with 3.7% GVA growth, the economy had indeed shown a V-shaped recovery. And when the second wave hit, that affected part momentum. If you are to regain that momentum and move beyond, vaccination is extremely important.
So the fact that now vaccinations are made free and supplies are doubled, we are looking to vaccinate at a steady pace. This means that GDP growth is expected to return, especially in the second half of the year. This will have an impact because when you look at the figures for the budget deficit, we can think of it as a proportion of GDP. Therefore, GDP growth affects our denominator. This is the first point.
The second point to consider is the scenario of last year. We had projected 9.5% of GDP as the budget deficit figure, when the actual figure is now 9.2% or 30 basis points lower. This time around, with an estimate of 6.5 percent for the current fiscal year, we’ve been much more realistic. I think once the growth numbers go up and I expect that at least some fiscal momentum on the indirect tax side should continue. In addition, as the economy recovers, it is also possible that direct taxes will also increase. So what we saw last year could be repeated this year as well. At this point we are only two months away and I think it is too early to start talking about any downside to the budget deficit figures as there is a lot of upside potential as well.
Next month India will enter its fifth year of GST. What kinds of key changes would you suggest addressing as a priority now?
From an economic point of view, I would suggest continuing the very good work that has been done on compliance and letting it unfold to its full potential. Try to iron out some of the inefficiencies that exist in terms of the reverse rights structure. It would also be a good idea to think about the original proposal, of a three-level structure.
How do you see inflation, especially bearing in mind the rising prices of fuels and edible oils as well as the forecast for a normal monsoon?
When you look at CPI inflation, the biggest contributor is food inflation. Last year, for several months, CPI inflation was above the 6% high, due to supply problems created by the pandemic. But since then, CPI inflation, and in particular the food inflation situation, has subsided and the normal monsoon is expected to help further easing. But I would also like, perhaps, over the next couple of months or so, to watch the food inflation front.
In the medium to long term, if you look at food inflation itself, we and our analysis have actually shown that there are two areas – pulses and oilseeds, where inflation has been higher. And this is mainly due to the mismatch between demand and supply. This is something we should seek to correct by increasing domestic production, ensuring that the producer incentives for both are better aligned. Moreover, in the medium to long term, not only reforms but the creation of infrastructure would help reduce the supply side frictions, which are really essential to contain food inflation.