The COVID-19 pandemic represents an unprecedented global crisis. The IMF estimates that world output will contract by 3.5 per cent in 2020, with a recovery in 2021, leading to a positive growth rate of 5.5 per cent in the current year. In comparison, India’s real income is estimated to have contracted by 8 per cent in 2020, with a recovery of a positive 11.5 per cent growth rate in 2021. Given the seriousness of the economic situation and that the decline in India’s output in 2020 is unprecedented, how likely it is that the set of measures included in the Union Budget of 2021-2022 lead to a sustainable recovery out of the current economic crisis?
To address this question, one must understand first that the COVID-19 pandemic is like no other crisis in contemporary times. Economic crises are usually shocks to aggregate demand or to aggregate supply. The global financial crisis of 2008 was a massive negative aggregate demand shock, leading to a prolonged recession. The oil price shocks of the 1970s were aggregate supply shocks leading to stagflation. The peculiar nature of the COVID-19 pandemic was that it was both an aggregate supply shock and an aggregate demand shock. It was an aggregate supply shock as government lockdowns led to workers not being able to go to work, even though factories and service sector establishments were ready to use their workforces to produce goods and services. It was an aggregate demand shock as economic uncertainty led firms and households to cut back on investment and consumption expenditures.
So this means that any plan for a sustainable recovery needs work both on aggregate supply and aggregate demand sides. How well does the Union Budget 2021-2022 do on this score?
First let us look at the measures related to aggregate supply. The most important factor inhibiting aggregate supply is the virus itself. The more it spreads, the more likely the possibility of future lockdowns. Further, the worry that ordinary citizens have about catching the virus implies that they will be less likely to go about their normal business, staying away from shops, restaurants and so on, which has a negative effect on economic activity. Therefore, the most effective way to address the aggregate supply side impact of the pandemic is bring the virus under control. The only real mechanism to do is to vaccinate the majority of the adult population. The Indian government has embarked on a mass scale vaccination campaign and the expenditures relating to the vaccine rollout has been incorporated with an allocation of Rs. 35,0000, as part of an increase in the outlay for health by 137 per cent from the previous year. Clearly, the sooner the vaccines reach every corner of the country, and bring the virus under control, the more likely it is that the negative aggregate supply side effect of the pandemic will diminish over time.
Now let us look at the aggregate demand side. Though some may view with concern the estimated increase in the ratio of the fiscal deficit to GDP to 9.5 per cent, at a moment of crisis that the Indian economy is going through currently, the need of the hour is “do whatever it takes” fiscal policies that do not value fiscal austerity over Keynesian style financing. The budget does deliver on this front. There are other noteworthy measures on the aggregate demand side such as the creation of an infrastructure focused Development Financial Institution with a capital base of Rs 20,000 crore, and an increase in capital expenditure on infrastructure. The relaxation of controls on foreign direct investment in insurance and measures for addressing the non-performing asset problem of public sector banks are also welcome. More could have been done to increase public investment in agriculture, which is critical to revive agricultural growth, and may have had a complementary positive effect on the agricultural marketing reforms that are planned. There also could have been a stronger focus on demand side measures that are particularly targeted to the informal poor, who have suffered the most during the pandemic.
The Union Budget 2021-2022 may well be seen as a “pandemic” budget as it focuses on the here and now, and prioritises measures that will take the Indian economy out of its current tail-spin as quickly as possible. Longer-term reforms that can take India back on the rapid growth path that it experienced in the 2000s are less of a priority in this budget. There is time for such reforms in the years ahead, and if the measures in the budget can trigger a rapid recovery of the Indian economy in this year, that will be a major achievement of the Union Budget of 2021-2022.