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India’s GDP & fiscal situation seem back on track. Reforms must continue to build confidence

The 20.1% growth in Q1 FY22 was largely driven by the base effect. Structural reforms including disinvestment and bank privatisation needed to ensure a sustained growth path.

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India’s gross domestic product (GDP) grew by 20.1 per cent during the April-June quarter of the 2021-22 financial year. The strong growth was largely driven by the base effect as the economy had contracted by 24.4 per cent in the year-ago period.

Growth was aided by a 68.3 per cent and 49.6 per cent rise in the construction and manufacturing sectors, respectively.

Sectoral Q1 GDP growth 

The first quarter GDP numbers were largely in line with expectations. While in absolute terms, the GDP at constant prices at Rs 32.38 lakh crore was higher than the GDP in the corresponding period of the last year, it is still below the GDP in the first quarter of 2019-20.

The strong growth this quarter, particularly in the construction sector, augurs well for the economy. This sector would likely improve the employment prospects and would also help in lifting the muted credit demand.

The manufacturing growth is strong particularly for the formal sector and reflected in the impressive rise in output and profits of the corporate sector.

Agriculture continued to remain a strong pillar. Its contribution to GDP now needs to be monitored given the volatility in rainfall and the impact on sowing and harvest.

The financial sector recorded a modest 3.7 per cent rise against a contraction of 5 per cent in the year-ago period. This indicates that credit growth is still sluggish in the economy. As private investment gathers momentum, this number should see an improvement.

The high growth numbers will moderate as the base effect wanes. The Narendra Modi government needs to continue its reform agenda to provide a favourable environment for private investments.

Also read: India’s uncertain growth trajectory makes it tough for RBI to tinker with interest rates

Revenue collection and fiscal deficit

Due to the less stringent lockdown during the second wave of the pandemic, the Union government’s fiscal position has also emerged better. Unlike the first wave, the revenues did not see a collapse this time.

Aided by improved revenue collections, the fiscal deficit for the first four months of the current fiscal year came in at 21.3 per cent of the full-year target. During the first four months of the last fiscal, the deficit had breached the full-year target.

The government’s April-July fiscal deficit narrowed to a nine-year low primarily due to higher GST collections.

While expenditures were also curtailed, a pick up in revenues indicate recovery in economic activities. Improved fiscal position in this period indicates that the government would be able to meet its fiscal deficit target of 6.8 per cent or may even manage to do better. This could give the government the flexibility to meet additional spending needs on account of a possible third wave.

While the fiscal position has improved and growth has seen a turnaround, the Modi government needs to continue structural reforms to improve the investment climate and ensure a sustained growth path.

Also read: India is walking on one leg because 1991 reforms missed banking & finance

Stroke of the pen reforms 

While public investment in infrastructure and long term institution building such as better regulators and reduced red tape are essential for building the confidence of investors, there still remain some stroke of the pen reforms or legal changes that can help improve confidence. 

The scrapping of the retrospective tax was one such while others like trade and investment treaties can help in bringing in foreign investors.

Decriminalisation of financial laws are among the reforms that have been proposed by the Modi government. So far, it has decriminalised various sections of the Companies Act by removing or reducing penal provisions and omitting imprisonment for various offences that are considered to be procedural or technical in nature. This will help in ease of doing business. 

As assured earlier, the government should also take steps towards decriminalising the Income Tax Act and the Prevention of Money Laundering Act as part of steps to further improve the investment climate.

The Modi government has laid out an ambitious agenda for privatisation of public sector entities through its strategic disinvestment policy. On multiple occasions, it has suggested that the country needs to have faith in its private sector and that they should not be looked at with suspicion.

The pandemic has provided an opportunity to push ahead the disinvestment agenda as the government needs to garner additional resources to finance additional expenditure and welfare spending. 

The disinvestment target has been set at Rs 1.75 lakh crore for the current fiscal, largely from the Life Insurance Corporation IPO and privatisation of Bharat Petroleum Corp. Ltd.

The government also plans to take up the privatisation of two public sector banks and one general insurance company this fiscal. A bill to privatise state run general insurance companies has been passed by the Parliament. 

To move forward on the plan to privatise state run banks, the government must bring in the necessary amendments to the Bank Nationalisation Act. 

Further, the government has announced a National Monetisation Pipeline (NMP) worth over Rs 6 lakh crore through which it aims to lease many existing infrastructure assets such as ports, airports and highways to private players. Monetising operational infrastructure assets could help in financing new infrastructure. Here execution will be the key. The NMP needs to be transparent and remunerative for private players. Revisiting the recommendations of the Kelkar Committee on making PPPs work would be useful.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.

Also read: Why Covid crisis must push credit rating firms to overhaul their methods and address bias


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