There are two ways to read the Economic Survey. The first is to focus exclusively on the numbers. Predictably, that’s what many onlookers did. Can growth pick up to between 6.1-6.7 %, as the Survey projects? Will inflation really fall to 6.2-6.6% in March as the Survey expects? Does the Survey imply this year’s fiscal deficit number will be contained to 5.3% of GDP?
I would call this a relatively blinkered approach of interpreting the Survey. Private and public sector forecasts came with (an often significant) margin of error. Recall, last year’s Survey projected growth at 7.6%. Instead, growth will likely print closer to 5%—a whopping 30% miss! Risks of forecast errors are heightened in the current uncertain global environment, and a domestic environment peppered with state and general elections that are likely to constrain policymaking. Forecasts are also particularly vulnerable at turning points. Given all this, focusing primarily on the numbers is missing the forest for the trees.
Instead, in the current context—a high fiscal deficit, falling savings and investment, a high current account deficit (CAD), high retail inflation—it’s more useful to glean what the overarching theme of the Survey is. Is there an urgent call to action in some areas? What should be the policy priorities and how should they be optimally sequenced?
Using this lens, I would argue that the leitmotif of the Survey is “rebalancing” across various areas. This comes across explicitly in some areas such as reorienting national spending, but often implicitly in others such as the nature of fiscal consolidation and manner of financing the CAD.
At the heart of all this, however, is a seeming inconsistency. Exact magnitudes apart, the Survey calls for sustained fiscal consolidation, but projects a reasonably strong uptick in growth next year, and a moderation in inflation. But, on the face of it, aren’t these mutually inconsistent outcomes? Fiscal consolidation—as desirable as it is in the medium term—will be a drag on near-term growth next year. Don’t look any further than this year to see how and why. The government likely sticking to the revised fiscal deficit target of 5.3% of GDP, has meant that—on a cyclically-adjusted basis—the fiscal drag on activity this year has been a whopping 1.5% of GDP. No wonder growth has slowed much beyond expectations. This is not necessarily a bad thing, and an adjustment that needed to happen. More generally—given our past excesses—fiscal policy is forced to be