With a suitable fiscal policy, India can regain its growth objective amidst the global uncertainties. Elaborate
National Statistical Office (NSO) released India’s GDP data for Q3 of 2021-22 along with Second Advance Estimates (SAE) for 2021-22. Post COVID-19, the normalisation of the Indian economy has now been disturbed by the ongoing geopolitical uncertainties.
Issues that has affected the economy
- Covid pandemic
- Ukraine Crisis
- Slowdown of world economy due to lockdowns
- Supply side constraints
What has been the issues
- According to the NSO’s SAE, real GDP and GVA growth are expected to return to 8.9% and 8.3%, respectively, in 2021-22.
- Both real GDP and GVA fell by negative 6.6 percent and 4.8 percent in the COVID-19 year of 2020-21, respectively.
- Despite this gain, real GDP in 2021-22 is just slightly higher than the equivalent level of 145.2 lakh crore in 2019-20, at 147.7 lakh crore.
- Demand has been sluggish to recover because:
- The construction sector grew by only 1.9 percent in 2021-22 compared to 2019-20.
- Consumption demand, as assessed by private final consumption expenditure (PFCE), is only 1.2 percent higher in 2021-22 than in 2019-20.
- Investment demand, as measured by gross fixed capital formation (GFCF), is only 2.6 percent higher in 2021-22 than in 2019-20.
- There would also be some sectoral supply-side bottlenecks and cost escalation.
- With regards to petroleum product pricing, fertiliser subsidies, and other state expenditures, demand may grow.As a result, the government may confront difficulties in keeping the budgetary deficit within the planned range.Due to rising import expenditures and the depreciation of the Indian rupee, the current account balance will deteriorate.
- Increases in global crude oil prices may cause India’s real GDP growth to slow and CPI inflation to rise. If the cost of other imported goods rises as well, the inflationary impact would be greater.
- The current economic uncertainty has resulted in an increase in net Foreign Portfolio Investment (FPI) outflows from India and a decrease in net Foreign Direct Investment inflows (FDI).
- If oil marketing corporations do not boost petroleum product prices, oil sector-related subsidies will rise.
- The federal and state governments’ tax income would suffer if excise duty and value-added tax (VAT) on petroleum goods were reduced.
- Certain sectors would be affected by supply-side constraints and cost inflation. Fertilizers, iron and steel foundries, transportation, construction, and coal, all of which rely on petroleum products, are examples of these industries. India’s commerce with Russia and Ukraine might be disrupted as a result. The reason for this would be the end of SWIFT transactions.
- If the burden is transferred to consumers and industrial users, it may have an adverse effect on already sluggish investment and private spending.
- If growth is to be revived, maximum attention should be paid to supporting consumption growth and reducing the cost of industrial inputs with a view to improving capacity utilisation.
- The policy rate of the Reserve Bank of India (RBI) may be increased.
- In India, the burden of rising petroleum product prices should be properly distributed among consumers, industrial users, oil marketing corporations (OMCs), and the government.
- It can aid in reducing inflationary pressures and the dollar’s external movement.
How to structure
- Give an intro about India’s growth trajectory
- Explain some of the uncertainties- pandemic, Ukraine crisis etc. Mention the challenges posed due to this
- Discuss how a fiscal policy can help achieve its growth trajectory and objectives
- Mention the major areas that must be focused in this fiscal policy
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