A sad story. That GDP growth plunged to a 11-year low in FY2019-20 at 4.2%. That estimates made in the February 1 budget are now way off, with attendant implications for the fiscal deficit, for government borrowing and interest rates. Worse, that growth in the January-March 2020 quarter plunged to 3.1%, the lowest since the GDP base year was revised to 2011-12; even as estimates for three previous quarters were revised down, suggesting the economy had slowed significantly, well before Covid-19 hit us.
The national lockdown started on March 25. On paper, therefore, it should have affected only about one week’s activity in Q1. If, despite that, growth should fall so sharply, it is a sombre warning of how the rest of the current fiscal is likely to unfold. Of whether we will see any growth. Or whether, in line with predictions, the economy will contract somewhere between 25% and 40%.
The harsh reality is that two months into FY2020-21, not only are we nowhere near returning to pre-Covid-19 levels of economic activity, but we also have no idea when ‘normalcy’ will return. The 13 urban centres that remain hotspots for the virus are also the main centres of economic activity. Given the reality of inter-linked supply chains, resumption of activity elsewhere will not translate into much. Add to that the shortage of labour, consequent on the flight of migrant labour to their villages, and the shortage of capital from risk-averse banks and we have the recipe for a perfect, if prolonged, ‘storm’.
There is nothing inevitable about this. Sure, it will be a while before we get back anywhere near the 7-8% growth of the go-go years. But there is no reason why growth should fall off the cliff. Provided — and this is the big if — GoI reads the message contained in the GDP numbers, takes courage in its hand, and goes all out to stimulate demand. That is what virtually every other government in the world is doing.
Sadly, GoI seems to be a prisoner of its own fears. Rather than let fiscal policy take the lead, it seems content to shoot over RBI’s shoulder, seemingly impervious to both theory and practice when it comes to the right fiscal-monetary policy mix in a downturn. The truth is no amount of over-compensation by monetary policy can make up for the drag of a mindlessly conservative fiscal policy. A `20 lakh crore stimulus package that is no more than a tenth of the headline number once the fluff is removed, is grossly unequal to the task on hand.
In such a scenario, RBI’s actions are like water off a duck’s back. Repeated reductions in repo and reverse rates and other financial and regulatory measures will not result in increased credit offtake. Banks have been depositing most of the excess liquidity with RBI rather than lend, thanks to elevated risk levels. Finance minister Nirmala Sitharaman’s announcement of a 100% sovereign guarantee for fresh credit (20% of outstanding) to the extent of `3 lakh crore to MSMEs is unlikely to change this risk perception. Of course, we might see some lending happen, courtesy not-sogentle arm-twisting of public sector banks. But that will not change the growth trajectory.
High-frequency economic indicators already point to a deep contraction in economic activity. Industrial output contracted an unprecedented 16.7% in March, and is bound to see an even sharper reduction in April, when the entire country was under lockdown for the entire month. Core sector output fell 38% in April, steel and cement output falling by more than 80% YoY. The truth is there is no alternative to government spending. The FM is right when she says it is difficult to make a realistic assessment of growth at this point, as there is no clarity of when the pandemic would retreat. But precise numbers are irrelevant. What is relevant is that our growth rate would be grossly inadequate for a country of our size and need.
At a time when the International Monetary Fund (IMF) expects the global economy to contract 3%, the US economy to shrink 5.9%, the eurozone to shrink by between 8% and 12%, it is naïve to expect the Indian economy to be immune from the knock-out effects of the virus. It is instructive to remember that in October 2008, soon after Lehman Brothers collapsed, IMF predicted the US economy would grow 0.1% in 2009, countries in the eurozone 0.2% and the global economy 2.6%. What happened was a far cry from those predictions. Output declined 3.5%, 4.2% and 2.6%, respectively.
So, when IMF’s head Kristalina Georgieva says ‘Covid-19 is a crisis like no other’ and US Fed chief Jerome Powell says ‘The downturn is without modern precedent’, heed their words. Our response to the crisis, too, must be ‘like no other’.