Pradeep Kumar Panda
The Central Statistics Office (CSO) has projected the Indian Economy’s growth rate for 2019-20 at 5%, the lowest in the current series with 2011-12 as the base year. This projection is an 11-year low.
This first advance estimate is much lower than the 7% growth rate projected in the Economic Survey as also the average forecast of 5.5% by major agencies but on a par with RBI’s latest estimate of 5%.
The government estimated that the gross value added (GVA), a more realistic guide to measure changes in the aggregate value of goods and services produced, will grow at 4.9% in 2019-20.
All the three sectors of the economy, agriculture, industry and services, are projected to grow at a lower rate than the previous year. However, industry is the worst hit, with the growth rate at just a third of the previous year.
Most worrying is the performance of the manufacturing sector, projected to grow at just 2% against 6.9% in the previous fiscal. Manufacturing sector growth holds the key to job creation as one direct job in this sector leads to the creation of four indirect jobs.
Construction, electricity, gas and water supply were the other laggards, while some sectors, including mining, public administration, and defense, showed some improvement.
The key news in CSO’s first advanced estimates is the fall in the nominal GDP growth to 7.5% in FY20 compared to the previous peak of 13.8% in financial year 2013, a fall of 6.3 percentage points. This translates into a fall in tax revenues and an increase in the fiscal deficit, both detrimental to growth. The estimated real GDP growth at 5% was earlier anticipated by the RBI, and the CSO release confirms the continuing slowdown since long time.
Even nominal GDP growth estimated at 7.5% for FY20 will have a significant implication for the economy, most importantly relating to fiscal deficit and debt servicing.A lower denominator will magnify the fiscal deficit as a percentage of GDP and borrowing at a cost higher than nominal GDP will pose debt servicing challenge.
The value of GDP is projected at ₹147.79-lakh crore and ₹204.42-lakh crore at constant and current prices, respectively. With this, the calculation for fiscal defict will also change and is likely to be 3.5% of GDP against the 3.3% projected in the Budget.
Around 50% of the slowdown is explained by tight liquidity and low consumer confidence, and just over 40% by slowing global economic activity. Another important finding is that the absence of a fiscal stimulus explains around 7% of the slowdown. Policy choices and dilemmas are clear from these numbers. The net effect of domestic boosters may end up being a small positive, or not even that, depending on the impact of the global drag.
Basically, given that India is a taker and not a player in the global economy, and given the reasonable assumption that the worst effect of the Trump trade war hasn’t yet played out, the economy desperately needs to keep consumer confidence up, and credit to flow far more freely — with the government not ruling out the option of a higher fiscal spend down the line.
Indian Govt’s package is a good start because it squarely addresses some of these aspects. The withdrawal of the two bad taxes — on capital gains and startup funding — and attempts to encourage more retail credit flows and energize aggregate demand, should impact economic sentiments and, therefore, consumer confidence.
Front-loading bank recapitalization and other tweaks in the credit supply chain, as well as the promised quick disbursal of tax refunds and vendor payments to the private sector, plus Sitharaman’s repeated emphases on saner tax administration, should impact credit flow, sentiments and, therefore, activity in the economic production side.
We don’t know what the finance minister’s other two sets of announcements will entail. But the fact that there’s recognition that more is needed is good —indeed, even more than what GoI does shortly may be required, given specifics of this round of slowdown. This slowdown has been the longest in recent times starting early 2018.
That the slowdown predated the Infrastructure Leasing & Financial Services (IL&FS)-induced non-banking financial company (NBFC) crisis. That consumption has not just been the biggest drag, but that it also started falling across some of its sub-segments before 2018. And that while much attention is focused on the auto sector, which contributes a third of the consumption slowdown, non-auto consumption items are responsible for twice as much.
These findings seem to indicate that domestic consumption will require a sustained and big policy push to substantively revive. And that’s after assuming credit flows to economic agents revive significantly and stay so. Therefore, given the big consumption problem, given available policy options for the government, and given the huge impact of the global economic slowdown, the need for a consumption-boosting Keynesian multiplier may be more acute than the government may like.
A tiny departure from the fiscal carefulness has already happened via the decision that Indian Government will start replacing its old cars with new ones. Over the next three-four quarters, bigger and more creative fiscal options may have to be —or, indeed, should be — considered.
The Reserve Bank of India (RBI) has already transferred Rs 1.76 lakh crore of its ‘excess capital’ to the government — this is nearly double the Rs 90,000 crore central bank transfer assumed in 2019-20 Budget, however, around Rs 28,000 crore is already accounted for as interim dividend for 2018-19. It would be smart to spend the extra amount in bang-for-buck ways, aimed at the fastest and deepest impact on consumption expenditure.
But aside that, the finance ministry must not right now be rigid on the fiscal deficit. Inflation is low, consumption is hurting, exports are in dumps, and investment has been flat for a while. So, the government should proactively plan a fiscal boost and execute it as a sort of an emergency economic measure, should, for example, the consumption slowdown continue to drag everything else down.
Assuming a significant rise in consumer confidence and easier liquidity/credit conditions, economic activity may rise by March 2020. The rise is modest, and global slow growth and ‘negative fiscal impulses’ are likely to be the main drags. Fiscal Stimulus is the solution for arresting the slowdown.
(The author is a New Delhi based Economist)
