On August 31 evening, the country’s National Statistical Office (NSO) came out with the first quarter numbers, confirming that India’s GDP contracted by 23.9 percent. The contraction was expected, and rightly didn’t surprise many. The country went through one of the most stringent lock-downs globally, the numbers were on the expected lines. The indications coming in from those occupying the treasury benches, inferences, this was the bottom and the country is now looking at V-shape recovery trajectory.
Various non-discretionary as well as discretionary spending has started coming back to the economy. But not fully. And we also have to consider that in the previous fiscal, the economy was already slipping into slowdown. In 2019/20, the growth rate of 5.2 percent, started reducing quarter by quarter to first 4.4 percent, then 4.1 percent and then 3.1 percent. By the end of the fourth quarter, India started looking for lock-down options.
The lockdown numbers must be seen and analysed in shadow of the previous slowdown. The slowdown was happening because there was not enough money in the hands of the consumers. India is looking at a trajectory of achieving -12 percent in quarter ending September, and sub-zero by end of December and positives in March. The trajectory might look benign, but that is, because it is drawn in comparison to much lower base.
The real devil is the consumption. The contraction has killed the capacity and capability of the middle class to spend. This was already shrinking by the end of the fourth quarter of 2019/20. To bring this enthusiasm back, lot of sweat needs to percolate. There is a constant danger, the recovery could either get prolonged or might steep again by the end of the 2021/21, if the paying capacity of the consumers doesn’t increase. The contraction has already led to either loss of jobs or massive cuts in the salaries; the corporate earnings also have nosedived. This is counterproductive, if the country wants to get into consumption—discretionary as well as non-discretionary—expenditure.
The devil was in the details. the final consumption expenditure numbers’ contraction to 54.3 percent, compared to a 56.4 percent growth in the same period a year ago. This number is a realistic measure to track the household spending. The consumption also collapsed.
Most of the European countries which went through the lock-down had much less impact on the growth numbers. There were two reasons, a) their COVID cycle hit them early and b) the safety net they had for their citizens, allowed them to have enough money to start spending immediately after opening up.
How can India boost the consumption and increase money in hand? The biggest enemy of boosting consumption is fear of uncertainty. On August 31, India reported 79,457 infected cases, with a total 3,649,639 total positive numbers. India is rapidly narrowing the gap with Brazil. Despite repeated warnings from the centre, states are still making their own rules to create barriers and restrict economic activities. They need to understand, at this stage, lock-down is not a solution albeit aggressive testing and augmentation of healthcare is.
This will automatically shore up the trajectory of the vital stats. There is already -38.1 percent contraction in the industrial output, services —where bulk of the jobs were allowed with work from home facilities— shrank by 20.6 percent, manufacturing had contracted by 39.3 percent, trade, hotels by -47 percent. Remember these numbers were in comparison to the same quarter in previous years, when the economy was still growing by more than 5 percent. Mining is at -23.3. percent, Power and Gas is at -7 percent, Public Administration is at -10.3 percent, Construction at -50.3 percent, Real Estate at -5.3 percent.
These are the worst quarterly performance since independence.
So in this case, what can India do? Go for inflationary expenditure. But remember, inflation is like a steroid, and not the permanent solution. But to get out of the negative territory, there is no harm in taking this ecstasy. There is a need for massive escalation in the capital expenditure —public as well as private— in sectors like construction of roads, railways, airports, telecom, ports. Bring in capital from foreign shores to reposition India into the global value chain manufacturing. And RBI must cut the benchmark rates further. India is among the few global economies, that has the capacity to further cut down these rates.
This will not only allow the cost of capital for the businesses to come down, but would also give exchequer some headroom in servicing the debt. Since most of the sovereign debt is from domestic sources, the rate cut reduces the servicing rate.
At present, the centre has real issues on the GST collections. The moratorium on the bank’s repayment ended in August, but for direct and indirect tax payers the limit is extended till November end. The government receipt will not improve by then. The confrontation with the states on devolution of funds will continue.
On raising debt for states, only eight states have appetite to consume the 2 percent expansion of the fiscal deficit allowed by Nirmala Sitharaman led Finance Ministry. Most of the states have put an embargo on the capital expenditure till September this year, but would not have much money left to restart many of the projects. There are two options, a) if the centre takes debt on their own balance-sheet and then devolves to the states, or b) if RBI gives them an extended window with WMA. The centre also has another two extra ordinary options; a) to go for console bonds and b) print more currency.
Some of these initiatives will shore up the chances of integrating the economy into the already rolled out long term reforms to clinch the country’s potential in manufacturing and agriculture segments.
(Mahajan is a Climate Change analyst & Commentator on Economy & Policy. She is also Co-Founder, Council for International Economic Understanding.)