The conventional mode of the policy making comprises of a pre-determined process of an upfront analysis of the issue, detailed planning and meticulous implementation thereof. This waterfall approach is often used in the formulation of the five-year plans and the urban master-plans.
However, the conventional approach may not be suitable when there are forces that make the real world a rather complex and unpredictable place subject to all kinds of random shocks and unintended consequences. And so, the Economic Survey 2022 marked a shift from this Waterfall approach to the alternative “Agile” approach that rather describes how India responded to the various criticalities that emanated from the sudden onslaught of the pandemic on the health as well as the economic front.
This framework is based on feed-back loops, real-time monitoring of actual outcomes, flexible responses, safety-net buffers and so on. Planning has a more pragmatic role to play in this framework by suggesting the alternative policy options available to deal with the vulnerable sections, rather than just following a deterministic prediction of the flow of events. It seems quite practical an approach because it allows for constant monitoring of the data relating to things like the volume of GST collections, digital payments, satellite photographs, electricity production, cargo movements, internal/external trade, infrastructure roll-out, delivery of various schemes, mobility indicators and the like.
Such an approach makes it possible to take immediate or short-term policy responses to an evolving situation on real time basis rather than what a model may have predicted. Such an approach adopts a combination of policies that encourage economic flexibility through innovation, entrepreneurship and risk-taking on one hand, and making investment in resilient infrastructure, social safety-nets and macro-economic buffers on the other.
Dealing with uncertain future
The economic survey 2022 highlights the linkages between apparently disparate policies ranging from deregulation, process simplification, privatization, foreign exchange reserves accumulation, inflation-targeting, housing-for all, green technology, the Insolvency and Bankruptcy Code, health insurance for the poor, financial inclusion, infrastructure spending, direct benefit transfers and so on. They are all focused about how to seek protection from or taking advantage of an uncertain future.
Covid19 pandemic has adversely affected the world economy in the past two years. The multiple waves of viral infection prolonged the duration and intensity of the mass lock downs and caused severe supply-chain disruptions leading to inflationary pressures that posed immense challenges for policy-making. The focus of policy making shifted to providing safety-nets to cushion the impact on vulnerable sections of society and the business sector on one hand and to increase capital expenditure on infrastructure to support medium-term demand along with taking several supply-side measures for a sustained long-term expansion of the economy on the other. Economic Survey explains how this flexible and multi-layered approach is partly based on an “Agile” framework that uses feedback-loops, and the monitoring of real-time data.
Indian Economy seems to have bounced back
According to the Economic Survey advance estimates, the Indian economy is expected to achieve real GDP expansion of 9.2 per cent in the year 2021-22 and so it appears that overall economic activity has recovered past the pre-pandemic levels. Almost all indicators show that the economic impact of the “second wave” in Q1 was much smaller than that experienced during the full lockdown phase in 2020-21 even though the health impact was more severe in the second wave.
Luckily for India, agriculture and allied sectors that support majority of the population have been the least impacted by the pandemic and they are expected to grow at a higher rate of 3.9 per cent in 2021-22 compared to 3.6 per cent in the previous year. On the other hand, the GVA of Industry (including mining and construction) is estimated to rise by 11.8 per cent in 2021-22 after contracting by 7 per cent in 2020-21. However, the Services sector has been the hardest hit by the pandemic, as most segments in this sector involve human contact. However, even this sector is estimated to grow by 8.2 per cent this financial year following last year’s 8.4 per cent contraction.
There is growth in total consumption, which is estimated to have grown by 7.0 per cent in 2021-22. Largely, it was due to increased government spending during the pandemic times. Similarly, Gross Fixed Capital Formation exceeded pre-pandemic levels largely due to increase in public expenditure on infrastructure. Also exports of both goods and services have also registered impressive growth, yet, imports also recovered strongly with recovery in domestic demand though higher international commodity prices also contributed to inflationary pressures.
Indian Economy is projected to do well this year
The positive factor is that the vaccination programme has already covered the bulk of India’s population, and the economic momentum seems to be building back. Besides, the economy may also benefit from continued supply-side reforms and so the Economic Survey projects a GDP growth at the rate of 8.0-8.5 per cent in 2022-23.
However, the global environment still remains uncertain in the light of the newer variants of covid19, rising inflation, and the policy reversal initiated by major central banks in many countries in the world. This is why it is especially important to look at India’s macroeconomic stability indicators and their ability to provide a buffer against the above stresses.
But the good thing is that despite so many disruptions caused by the global pandemic, India’s balance of payments remained in surplus throughout the last two years and so the foreign exchange reserves also have increased to US$ 634 billion on 31st December 2021 which is around 13.2 months of merchandise imports and is even higher than the country’s external debt. The combination of high foreign exchange reserves, sustained foreign direct investment, and rising export earnings will provide an adequate buffer against possible global liquidity tapering in 2022-23.
Policy responses have been positive in many sectors
Even as the government debt increased in the year 2020-21 due to enhanced fiscal support given to the economy to deal with the pandemic related health and economic crisis, yet a strong rebound in government revenues in 2021-22 has given the Government a fiscal space to accommodate its health and capital expenditures.
Further the Indian financial system has shown remarkable resilience in turbulence caused by the pandemic and global cues. The banks have generally met capital adequacy requirements and there has been a structural decline in Non-Performing Assets.
Vaccination drive has got impetus and around 157 crore doses that covered 91 crore people with at least one dose and 66 crore with both doses. The vaccination process for boosters and for the 15-18 years age group is also in full swing.
Agile approach to handle rising inflationary pressures
Inflation has become one of the major economic issues at global level in both advanced and emerging economies. In India also the Consumer Price Index inflation increased by 5.6 per cent year on year basis in December 2021. However, it is still within the targeted tolerance band. However, the wholesale price inflation has crossed double-digits which could partly be due to lower base effect. But inflationary pressures may escalate if global energy prices keep increasing.
However, the macro-economic stability indicators suggest that the Indian economy may be in a comfortable position to handle the challenges of 2022-23 thanks to the its unique response strategy. The focus was on using safety-nets for vulnerable sections on one hand while responding iteratively based on Bayesian-updating of information. A flexible, iterative “Agile” approach used eighty High Frequency Indicators (HFIs) in an environment of extreme uncertainty seems to working for Indian economy.
The challenge of keeping inflation within the acceptable limits has been tackled by increased emphasis on supply-side reforms side by side with demand management. These supply-side reforms include deregulation of numerous sectors, simplification of processes, removal of retrospective tax, privatization, production-linked incentives and so on. A sharp increase in capital spending by the Government can also be visualized as combo effort to manage both demand and supply forces.