Recovery needs a calibrated road map
October 23, 2020
Unusual times need bold steps; what is needed for revival is rightly targeted and timed adequate fiscal sop. — KK Srivastava
The Indian Economy is reverting from the depths of pandemic induced crisis. It is facing an uphill climb that will be long, uneven, and uncertain, also prone to setbacks. India faces a precarious situation with weak health system, depending on sectors having fallen prey to declining demand, high unemployment and loss of income etc. Several years of stagnating investments – primarily in the private sector – and, more recently, decelerating consumption are growth killers for the economy. The fast moving consumer goods (FMCG) sector, however, is somewhat upbeat on second quarter numbers, pointing towards inching of demand revival to pre-Covid levels, driven by the relaxation in restrictions as well as the consumers adjusting to the new normal. This revival was primarily driven by consumers in semi urban and rural areas, thanks to good harvest, normal monsoon, rural welfare schemes, and relatively less impact of the virus.
Demand Boost Index
Month Metro Tier-1 Rural
June 87 91 108
July 93 99 117
August 86 89 104
The revival, however, is rather disappointing. While the credit deposit ratio of banks as on 27 March 2020 stood at 76.4%, it fell to 71.8% on 11 Sep. 2020. This implies that both corporates and individuals are going slow on borrowing given the brutality of economic constriction. Those with income have been cutting down on spending and saving more for the tough times being anticipated to lie ahead. This is also witnessed in consumer goods companies’ tapering value growth rates in urban markets, as customers opt for lower priced products and job losses in informal and services sectors in cities, as well as due to lack of sops for the urban poor. Pantry loading in cities has stopped now. A lot of sectors witnessed salary cuts, and job losses, which shrunk income of urban consumers who are spending gingerly. Yes, it is not that the economy is not growing. GST collection stood at over Rs. 95,000 crore in September, rising 4% YOY after 6 months of contraction; record 57 million e-way bills were generated; manufacturing PMI rose to 56.8, highest since January, 2012; and car sales, freight traffic too have shown an uptick. There were 2 stimulus packages – Pradhan Mantri Garib Kalyan Package and Atmanirbhar Bharat Package, aggregating to Rs. 20 trillion, or 10% of the country’s GDP. All the money and assistance have gone directly through DBT into bank accounts and in the hands of deserving people. Refunds to the tune of Rs. 1.18 trillion in direct taxes and Rs. 66,861 crore in indirect taxes further boosted liquidity in the system. Rs. 2.17 trillion were transferred to states as devolution of central taxes in the first 5 months of 2020-21. Recent trends of economic recovery bear the testimony of timely intervention by the Govt. to mitigate the fallout from the Covid induced lockdown.
But the recent data should be cautiously interpreted. Recovery in manufacturing could be due to the pent up demand of first quarter. GST collection may be looking good because of the filing for previous month. It is still to be seen if the recovery will be sustained, especially when credit and investment demand is still tepid. While the virus infection curve is showing initial signs of flattening, the prevalence of it and the not unlikely possibility of a trend reversal, will continue to impact adversely many sectors of the economy, especially hospitality and tourism. The course of stable economic recovery will be sustained only when Covid does not trouble any more and there are right kind of policy interventions.
Since the problem exists from aggregate demand side, it is no time for timidity; rather, the Govt. needs to be more open fisted. The slow pace of normalization of economic activity could partly be attributed to the prolonged period of stringent lockdown on one hand and the inherent vulnerabilities of the domestic economy on the other. No doubt the previous policy intervention was critical as it was a rescue and relief package preventing the firms from going bust; it tried to support business through extension of credit, macro prudential norms and regulatory forbearance. Now another round of stimulus, in view of the fact that a bulk of economic activity has been permitted across states, and the threat of the outbreak of pandemic is receding, could be provided to revive economic recovery. A fiscal package should revive aggregate demand. Thus a Keynesian stimulus in the form of higher govt. spending greater transfer to federal bodies, conditional tax cuts/deferment, and DBTs should help.
India may have a current account surplus of $30 billion this year, which in simple words means that we are failing to invest all that we have saved, and are exporting our savings. Govt. is falling shy to borrow and spend, in turn weakening economic recovery. True, tax receipts have been positive in September, and the PMI indicates strong growth, but this is from a low base. Borrowing at the current level is unlikely to leave much for additional spending which in turn may mean a near double digit economic contraction in the current fiscal. Minus positive decent growth millions will be condemned to poverty and joblessness.
The Govt. has been of late talking of stimulus package 2.0. If the noises in the air are right, it would likely consist of production linked incentive schemes for a clutch of sectors, including steel, textiles, and food processing, more incentives for infrastructure and construction sectors, given their high labour content, and an employment guarantee scheme for the urban poor. Besides, a host of additional welfare/relief measures targeted at the vulnerable sections are likely to be announced. But the Govt., in all likelihood, will act conservative. Budgetary cost of stimulus 2.0 may be limited to Rs. 1.0-1.5 lakh crore. Extra burden on budget from stimuli to be announced so far are below Rs. 3 lakh crore. Centre is likely to keep its budget size for this fiscal to be within 30.4 lakh crore.
Instead, the Govt. needs a clear road map for fiscal intervention to maximise its impact on the economy. A clear roadmap will help all stakeholders, including financial markets and the Govt. itself. The RBI will be in a better position to make necessary intervention in the form of borrowings from domestic and international sources to raise resources. The RBI’s currency market interventions to prevent the rupee from appreciating can create surplus liquidity which can be routed to funding Govt. borrowing through policy measures.
Equally, for effective revival, first of all we should analyse how the economic loss of 8-10% decline in GDP (for FY 21) is being borne by different sectors- govt., wage earners, informal business, or formal business. This will give us a clue about the points of intervention. It is widely believed, and rightly so, that the most ravaged segments have been wage workers, informal workers, and informal enterprises. Agriculture and formal business has been relatively unscathed. Thus the policy makers need to devise schemes for fund transfers to them without leakages and misdirection.
To sum it all, there is a need to revive the aggregate demand through bold fiscal measures. And the package should be targeted at vulnerable segments. A visionary-rather than bureaucratic – approach will work.
The author is Associate Professor, PDGAV Collage, University of Delhi