Only cyclical, structural recovery some time away

Almost all indicators now point to a quicker-than-expected recovery with the economy tipped to grow at about 10.5-11% in 2021-22. Consumer confidence is rising, even as infections fall and the vaccination drive intensifies. The services sector — tourism, transport, travel hospitality and entertainment — have all been badly hit; and it’s critical for the survival of thousands of small enterprises.

Unfortunately, though, this is a cyclical recovery and will not take us too far. A strong structural recovery is sometime away and will take root only once there is a big investment push. However, private sector investments are expected to remain weak for at least two more years with a deficit of demand and a surplus of capacity.

While the government’s budgeted capex for the next fiscal is around 26% higher at Rs 5.5 lakh crore, the increase in the total outlay (including PSUs funded via intra and extra budgetary resources) is just 4.5%; seen over FY20 too, it is a modest increase of 8.7%. For the key infrastructure sectors, the total public sector expenditure outlay will decline 3% to Rs 8.4 lakh crore next year.

To be sure, the two initiatives — incentivising manufacturing via the PLI schemes and the DFI that aims to build a Rs 5-lakh-crore portfolio in three years — are excellent but their impact would be felt two or three years down the line.

In the meantime, India Ratings says gross fixed capital formation in 2021-22 will be about 25% lower than the trend level.

That would leave the economy over-dependent on consumption. Private consumption was slowing well before the pandemic and is estimated to increase by about 11-11.5% next year, again below trend levels. Despite easy interest rates, a tough job market could stymie spends. Economists believe rural purchasing power could stagnate on the back of a smaller growth in farm incomes and very modest rural outlay. The government has reduced rural and social welfare spending by 26% for 2021-22 to Rs 5.5 lakh crore; among the schemes that have seen cuts are MGNREGA and PM Awas Yojana.

Larger companies will do well helped by bigger market shares, at the expense of the informal sector, and foreign capital. The large expenditure cuts will hurt both smaller businesses and the job market. In H1FY21, even as the total wage bill of the private sector saw only a modest increase, net of IT and BFSI companies, it actually shrank. The GDP at the end of 2021-22 will be where it was in 2019-20. But the weak – in business or otherwise – will be worse off than they were in March 2020.