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Extent of damage clearer, stage set for second stimulus

The urgency also stems from the RBI’s assessment that initial greenshoots visible in May-June had reversed in July and August, and that it will take some for the economy to mend and regain momentum.

Written by Aanchal Magazine | New Delhi |
Updated: September 1, 2020 7:46:06 pm
Extent of damage clearer, stage set for second stimulusGiven the first quarter numbers, experts say GDP looks set to record near double-digit contraction during FY21, down from an average of around -5 per cent projected earlier.

WITH THE FIRST official estimates of GDP data for April-June revealing the extent of damage the pandemic and the lockdown have inflicted on the economy, policy experts working closely with the government suggest it is time the finance ministry quickly announced a second round of fiscal stimulus targeted at the poor.

The urgency also stems from the RBI’s assessment that initial greenshoots visible in May-June had reversed in July and August, and that it will take some for the economy to mend and regain momentum.

After announcing the Rs 20 lakh crore AtmaNirbhar package in May, Finance Ministry officials had said they still did not have enough clarity on the state of the economy. Bulk of the package had then comprised monetary stimulus through liquidity measures, with just about 1 per cent of GDP actual cash outgo by the Centre. “We have to keep the gun powder dry and be prepared for the future,” a finance ministry official had said then.

In fact, in an interview to The Indian Express two days after announcing the fifth and final tranche of the AtmaNirbhar package, Finance Minister Nirmala Sitharaman had said, “I have to be ready (going ahead)… because no one knows how this is going to turn out, how this is going to end, how this is going to withdraw. So obviously I have to be ready, I can’t finish my story with these announcements.”

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Explained| India’s GDP growth contracts 23.9%: What is the economics behind the math?

Economists said the April-June contraction was actually worse than 23.9 per cent, with the impact of the informal sector manufacturing, the GDP growth is estimated to have contracted by over 30 per cent in the quarter, former Chief Statistician of India Pronab Sen said.

It is this sector which has faced the brunt of the lockdown, with huge job losses. The lack of data from the unorganised segments of the Indian manufacturing and services sector has meant that data collated from the organised segment of the Indian industry has been extrapolated to cover the informal sector. In reality, the informal sector is much worse off.

“Given today’s numbers, incorporating the informal sector, my estimate is that GDP number would be (-) 30 per cent. We have no idea what has happened to the informal sector, especially informal manufacturing. This is totally formal because we are using either the SEBI data for corporates along with the IIP which is also for the formal sector,” Sen told The Indian Express.

He said the impact of the informal sector would be visible only when the national accounts data will get revised to incorporate companies’ data from the Ministry of Corporate Affairs that would include data for unlisted companies also. “First revision will happen when MCA data comes…at the moment it’s only listed companies’ data,” he said.

Read| Only farm sector output sees growth, outpaces overall GDP

With investments, consumer spending, and exports — all collapsing after India’s lockdown imposed in late March, the GDP print for the June quarter showed that manufacturing has already entered a recession as the output fell 39.3 per cent in the June quarter after sliding 1.4 per cent in the previous quarter. But the real impact could be worse, with there being a very high probability that this data will undergo revisions in the future as the formal corporate data was used as a proxy for the informal sector.

The impact of growth slowdown for the informal sector is partly reflected in the construction sector, which recorded an overall decline of 50.3 per cent, with the contraction having been more reflective of the distress in urban areas than rural areas. “Construction is not built from accounts but from sale of steel, cement…informal construction sector has done a little better than that but that’s mostly rural. Formal construction sector which is mostly urban has done worse. Data is tilted more towards the urban segment otherwise it could have been shallower,” he said.

The GDP data also reflects differences in government expenditure with ‘public administration, defence and other services’ recording a 10.3 per cent contraction even deeper than 5.3 per cent contraction seen for financial, real estate and professional services, while government final consumption expenditure showing a rise of 16.4 per cent. Since expenditure on account of public administration is primarily government salaries, Sen said the decline is puzzling and could be then on account of a sharp cut in states’ expenditure.

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“Public administration is by and large driven by government salaries for which there seems to have been no indication of any cut. So, it could be that payments for defence equipment or payments for some public investment have been held up. But the GFCE number has risen. It is a puzzle. Unless states have clamped down completely on the expenditure. It could also be because they had to shift huge amounts of expenditure to disease management and humanitarian aid which may not show up in national accounts because those are transfers,” he said.

Also, the difference between Gross Value Added (GDP minus net product taxes) and the GDP is only 1.1 percentage points while the fall in indirect taxes was over 33 per cent in the same period, reflecting a possible decline in subsidies. “If net indirect taxes have fallen only by 1 percentage point, in a situation where we know taxes have fallen by a much larger amount, means that subsidies have also fallen, quite substantially. In a situation when everything is under stress and the government has also cut its subsidy, that’s not helping matters,” Sen said.

Given the first quarter numbers, experts say GDP looks set to record near double-digit contraction during FY21, down from an average of around -5 per cent projected earlier.

While the weakness in demand is expected to weigh across all sectors, experts say some policy support will be necessary to cushion any further deterioration, including increased infrastructure investment by the government and demand-boosting measures. But that is unlikely to happen, given that India’s fiscal deficit in the four months to end July is already at over 103 per cent of the budgeted target for the current fiscal year as faltering net tax receipts and higher expenditure took a toll of finances, government data showed Monday.

But the problem is the quality of spending so far. While the government has transferred money into Jan Dhan accounts — treated as a transfer and therefore as consumption — this has been a low multiplier. If the government were to actually buy goods and services, then that has a much higher multiplier, while if it spends on infrastructure projects that can take off quickly off the ground, that has the biggest multiplier. But with the deficit numbers being where they are, there doesn’t seem much headroom for the government to spend. Added to that are the delays in payments and transfers to states, which further erode the possibility of government expenditure seeing an increase.

While analysts said the June GDP numbers slightly improve chances of a rate cut in October, but unless the inflation comes below 5 per cent in the next reading, there is a real chance that the RBI might opt to postpone the rate cut to December.

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