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Budget 2022 should focus on public investment, rural sector & reviving private sector sentiment: CRISIL


India’s GDP growth will remain strong next fiscal as well, at 7.8%, and will be more broad-based, says Dipti Deshpande, Principal Economist at CRISIL. In an extensive interview with TOI’s Smriti Jain, Dipti talks about India’s growth prospects, sectors that will lead recovery, recommended measures in the Budget, and the problem of sticky inflation. Edited excerpts:Do you expect GDP growth to sustain in the coming quarters? By when will the recovery be more broad-based?In India, the recovery remains uneven, though the economy is ticking up steadily. As the pace of vaccination increases and the entire adult population gets fully vaccinated by early 2022, the laggard sectors should begin to catch up. This fiscal, we expect a GDP growth of 9.5%, riding on three factors; a weak base, global growth supporting recovery, and, rapid pace of vaccination leading to recovery in some of the consumer-facing sectors that were hit hard by a high rate of infection, physical restrictions and social distancing norms amid the pandemic. Growth will remain strong next fiscal as well, at 7.8%, and will be more broad-based. Consumer and business sentiment will take time to revive, unlike earlier occasions when these two agents played a crucial role in pulling the economy out of a slowdown. Instead, government capex — by the centre as well as the states — is expected to do the heavy lifting. Are there any stand-out sectors, formal or informal, that need a specific focus post-pandemic?Despite the sharp pick-up in growth expected this fiscal and in the next, the economy is unlikely to catch up to pre-pandemic levels in the next 3-4 years. This would mean a 10-11% permanent loss of real GDP vis-à-vis trend over this period. Several sectors have borne the brunt. Most of these are consumer-facing — specifically, contact-based sectors such as travel, tourism, hospitality, recreation and entertainment, as well as smaller firms — which could benefit from policy support. As the pace of vaccination increases, some of these will start seeing an initial uptick. However, the one-time effect could wear off over time unless demand prospects stay strong and policy support ensures business activity stays healthy. What steps can be taken in the Budget to support growth revival?Amid the economic revival, global risks, and an expected turn in monetary policy setting, there are three things the next Budget can focus on: 1. Continued thrust to public investment: A critical step the government took in the last Budget was to shift priority from aggressive fiscal consolidation to expansion. A stretched fiscal deficit glide path — assuming additional fiscal space, estimated at Rs 20-25 lakh crore over the next five years, is used for capex — can create large positives for growth, not only in the short term but also in the medium term. 2. In a similar vein, fiscal spending on NREGA, rural roads construction, etc, can provide huge support to rural areas, especially at a time when the sentiment is improving (with vaccination progress), but demand requires a push. 3. The continued push to the promising set of reforms already announced, such as the Production Linked Incentive Scheme, which can ensure private sector investment confidence improves. Do you see exports playing a bigger role in GDP growth in the years ahead?Exports are being touted as one of the key drivers of the Indian economy’s growth this fiscal, in a year when private consumption and investment are still reeling from the impact of the pandemic. Global factors are providing leverage — buoyant global growth, inventory restocking in early 2021 as economies open up, and a pandemic-induced shift towards consumption of goods are supporting this uptick. For most of 2021, India’s exports have clearly ridden the global tide and benefited from it. Some of these factors will continue to support for a few more quarters, while others may not. In fact, a mild weakness is visible already: for the second consecutive month in September, there was a sequential decline in India’s exports. Supply-chain disruptions and material shortages have been largely contributing to the recent slowdown in global trade. But, for the full fiscal to date, India’s exports have surged, growing past pre-pandemic levels. Our analysis suggests India’s exports exhibit high responsiveness to global growth. Hence, in the short run, with India’s major trading partners expected to recover well, Indian exports may continue to benefit from the rise in external demand. But forecasts suggest petering out of global growth in coming years as the impact of fiscal and monetary policy stimulus wanes. That could impact India’s exports, too. Inflation may be within the targeted RBI range but households are definitely feeling the pinch. What are the immediate steps that can be taken to ease that?The respite over the past three months is on account of food inflation, which dropped below 1% last month. But non-food inflation remains rigid at ~6%. In fact, elevated oil and commodity prices and continued pass-through of input costs by manufacturers continue to exert further upside pressure on this component of CPI inflation. This, at a time when the economy is trying to recover. The impact of high inflation has been disproportionate across income classes. Our recent study shows how the urban poor, or those in the bottom 20% of the expenditure segment and residing in urban areas, have seen the highest inflation rates of 5.6-5.9% in the last and this fiscal. For households, the biggest worries currently are edible oils inflation and non-food inflation. To be fair, both food and fuel prices have been victims of supply-side pressures. There is little the government can do on these counts directly, though the recent move to reduce the customs duty on imports of edible oil could offer some short-term respite. As for fuel inflation, the consumer has had to bear almost the entire brunt this time — not just on petrol and diesel prices, but also on kerosene and LPG. In addition, manufacturers, given the pressure on their profit margins because of rising input costs (stemming from higher oil and other commodity prices), have been passing on the incremental burden to consumers. In previous episodes of rising crude oil prices, the government had shared the burden with the consumer, while the affected industries were slow to pass them on, which afforded some cushion. The idea here is not to advocate fuel subsidies, but to highlight the consumer’s despair during this oil price shock and in the backdrop of the income hit due to the pandemic. One way the government can cushion the impact on consumers is by rolling back duties/taxes on petrol and diesel. As of October-end, of the ~Rs 28 and Rs 32 hike in diesel and petrol prices, respectively, Rs 17-19 is on account of taxes. In other words, about 50-56% of the retail price goes as excise duty and VAT. It is pertinent to note here, however, that almost all the increase in retail fuel prices since May this year has been on account of higher oil prices, while taxes have seen a smaller increase. Last week the centre and few states reduced duties/VAT on these fuels bringing in some relief to consumers. However, given the fiscal pressure, there may be limited scope to continue bringing down such duties. Interestingly, retail fuel inflation has risen faster than for the wholesale category as the tax component had shot up last year. Also, subsidies on all household fuels have nearly been done away with or remain at the minimum. That is showing up in CPI inflation. To add to this, global prices are spiralling and so the upside to non-food inflation remains. When do you see the MPC raising repo rate?The policy repo rate is currently the lowest in the last 10-12 years despite inflation staying closer to the RBI’s upper tolerance band. There are two reasons the RBI is more tolerant of inflation this time around: 1. Growth remains the foremost concern. The pick-up so far is gradual, fraught with risks, and is happening at a much slower pace than desired. Then, there are also pockets in the economy that are yet to see a sustained revival. Any move on the monetary policy front that pushes up interest rates in the economy could come in the way of this steady pick-up. 2. Secondly, the RBI is looking at the nature of inflation, which so far is mostly supply-driven. The coming months could, however, change this scene. As growth strengthens, demand conditions could improve and fuel inflation. That is when the RBI will likely move. Pressure to raise rates will also mount as global monetary policies turn towards normalcy. In its recent review, the Monetary Policy Committee signalled a gradual move towards ‘normalisation’. We expect this gradual normalisation to continue for a few months, and a 25 basis points hike in the repo rate by the end of this fiscal.


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