2020 was a year like no other in not-so-recent history and the upcoming Budget is expected to be like "never before" as the government aims to steer the economy towards a sustainable recovery. The Economic Survey tabled on January 29 has provided a direction to the economic outlook amidst the pandemic, setting the tone for the Union Budget 2021.
The emphasis of the Economic Survey has rightly been on healthcare, and one that we too have repeatedly highlighted. India needs to build its resilience and be better prepared for future uncertainties. The Survey stressed on mitigating information asymmetry and improving the quality of healthcare. We believe the allocation towards healthcare infrastructure should be higher (from the current 3.5% of GDP to at least 5% this year) and should reach the world average of 10% over the next 10 years. The trend of telemedicine, which has gathered pace post Covid-19, must be harnessed to ensure easier, cheaper, and efficient access to, and deeper penetration of healthcare.
The other emphasis of the Survey has been on innovation and higher spending on research and development (R&D). With the world witnessing a perceivable shift amongst global investors to diversify production supply chains, India must grab onto these crucial opportunities coming its way. While India can aim to be the next manufacturing hub, the nation must aspire to move up the global value chain simultaneously by spending on innovation and R&D. With the help of innovation, capital, and knowledge, industries can be better equipped to reach higher levels of sophistication in production and engage in pre- and post-production activities. Small enterprises and startups can play an important role in innovation as highlighted in the Survey.
Currently, India ranks 48th amongst 131 countries in terms of its innovation performance, with a lot of room to improve. At 37% of gross R&D expenditure, the Indian business sector contributes much less when compared to businesses in each of the top 10 economies (68% on average) globally. Incentives on R&D, reintroducing weighted deduction for R&D expenditure, and encouraging contract R&D could be a few ways the government can encourage businesses to spend on R&D.
The Survey also suggests that India must focus on expanding the overall economic pie and then redistributing it to lift the poor out of poverty and ensure income equality. The pandemic has hit the poor and unskilled population the most and the scale of disruption in the labour market that took place in 2020 is gradually coming to the fore. Some jobs will likely never come back as consumer and business behaviour shifts in response to the pandemic.
Recently, the International Labour Organization (ILO) warned that the current crisis may exacerbate the problem of income inequality, especially if the loss of several low-wage jobs turns out to be permanent. In short, the pandemic may have erased years of India’s efforts to improve its poverty and inequality index. Therefore, attention must be given to raise growth rapidly, redistribution of the increased income, and expanding the social security net. Besides, India needs investments in specialised education and targeted training to prepare its workforce of the future.
The other emphasis of the Survey has been on innovation and higher spending on research and development (R&D). With the world witnessing a perceivable shift amongst global investors to diversify production supply chains, India must grab onto these crucial opportunities coming its way. While India can aim to be the next manufacturing hub, the nation must aspire to move up the global value chain simultaneously by spending on innovation and R&D. With the help of innovation, capital, and knowledge, industries can be better equipped to reach higher levels of sophistication in production and engage in pre- and post-production activities. Small enterprises and startups can play an important role in innovation as highlighted in the Survey.
The good news is that the number of infections is coming down sharply since September 2020. The biggest vaccination drive is expected to break the infection chain, thereby, finally putting an end to the pandemic, even if it may not be immediate. The Survey predicts growth to contract in FY21 by 7.7% but it is expected to bounce back to 11% in FY22, suggesting a V-shaped economic recovery. We, too, has been optimistic about the outlook and had predicted double-digit growth (11.7%) for FY22 in December 2020.
However, the year 2020 will be a story of two halves. The first half may see a gradual economic recovery as the inoculation drive gathers pace while high inflation, poor demand, low credit, and slow investment growth create friction to growth. The second half will see much stronger growth in pent-up demand. Once consumers, especially among the top 10 income percentile of the population who could not spend because of mobility restrictions, believe that the virus is behind them, they will change their behaviour and go out and spend. Strong demand will spur higher investment leading to a virtuous cycle of job creation and sustainable growth.
The role of government policy measures and their effectiveness will be important in determining the strength and pace of the revival. The government institutions have ushered in a mix of Keynesian and Friedman policies in a series of several mini-Budgets to keep the economy afloat during the pandemic.
The upcoming Budget will be a continuation of that effort to launch the economy back on to a sustainable growth trajectory. Undoubtedly, the government has to think out of the box as it walks a tightrope of balancing growth and fiscal concerns.
Views are personal. The author is economist, Deloitte India.
