The past week has yet again been a rather hectic one for the Indian economy.
The biggest news was the release of the national income data for the first quarter of the current financial year. The GDP contracted by almost 24% and most economists now expect India’s GDP to contract by roughly 10% in 2020-21.
The second big development was the reprieve to Bharti Airtel and Vodafone Idea. In the annual gross revenue case, the Supreme Court allowed the telcos to pay their dues in a staggered manner over the coming 10 years. Earlier, these companies were expected to pay up in one go; doing so would have ruined their viability and, in the process, hurt this fast-growing sector of the Indian economy.
This week also saw the end date for the moratorium on repayment on loans. The focus now shifts to the RBI, which is expected to lay out the norms that will determine how existing loans will be restructured. This is the main event to watch out for in the coming week. The K V Kamath committee, which was formed by the RBI to suggest the norms for loan restructuring, is understood to have submitted its report. Restructuring of loans is crucial for a lot of firms that may go bankrupt if their payback calendar and terms are not tweaked.
It is important, however, to come back to the GDP data and reflect on the key takeaways and policy implications.
The first thing to note is that no matter how one calculated the GDP growth — quarter-on-quarter, year-on-year, annualised or non-annualised — India is the worst-affected among the major economies (see Chart below; source IMF).
That India’s economy is the worst-affected among global peers isn’t a shock for two reasons.
One, India had been steadily losing its growth momentum over the past three years; it grew at barely 3% in the quarter just before Covid hit.
Two, since then, India has steadily risen the ranks of the countries most afflicted. At last count, it added over 80,000 new cases in just one day. That’s not just more than the total cases in China but also the new record for a single day since the breakout of the pandemic.
The second key takeaway — as an Explained analysis on GDP data showed earlier in the week — is that the government has to spend substantially more if the Indian economy is to recover soon.
This, too, is hardly surprising because even before the release of the GDP data, it was repeatedly pointed out by many — including this newsletter — that the fiscal impulse in the Rs 20 lakh crore Atmanirbhar Bharat Abhiyan package was quite weak and will likely delay the recovery.
The third key takeaway is that the worst-affected sectors are the ones that create the maximum new jobs both for urban and rural Indians. Chart below (source: Kotak Economic Research) show how construction (which contracted by 50% in Q1), manufacturing (which contracted by 39%) and trade, hotels and other services (which contracted by 47%) create the most non-farm jobs in both rural and urban India.
The fourth key takeaway is that with incomes falling across the board, job prospects worsening and no clear fiscal stimulus on the horizon, most Indians are likely to save more than they spend. This reduction in their propensity to consume will further drag out the recovery process. To be sure, if everyone spent all the money they had, the aggregate demand, and GDP growth will recover fast. If everyone decided to save all the money, the demand will continue to founder, and the economy will struggle for long.
What are the policy implications?
The most important one is that the government must lead from the front instead of hiding behind the RBI-led credit schemes.
As the Chart below (source: Kotak Economic Research) shows, till now the Indian government has spent the least (in terms of the % of GDP) among its peers — be it the BRICS, or any other comparable country such as the UK or Indonesia. In fact, India’s direct additional spending is just one-third of the average among emerging economies and one-ninth the average among developed countries.
The other big policy question is: how should the government spend the additional money?
Here it merits referencing back to the two rulers from India’s past that I mention in the headline.
Asaf-ud-Daula was the Nawab of Oudh between 1748 and 1797. In 1775, he shifted the capital of Oudh from Faizabad (near Ayodhya) to Lucknow. In economic policymaking terms, he was quite Keynesian. Every time there was a famine or dip in economic activity, Asaf-ud-Daula would employ the poor to construct a new building of some sort in lieu of food or money.
This policy resulted in many iconic structures of Lucknow such as Bara Imambara and Rumi Darwaza and earned him the saying “jis ko na de maula, usko de Asaf-ud-Daula” (Those who are disappointed even by the Almighty are taken care of by Asaf-ud-Daula). This is relevant at a time when the government of India has tried to get away from its commitments by stating that the current poor state of the economy is an act of god.
While Asaf-ud-Daula was the master of providing immediate relief to the poor, Sher Shah Suri, who wrested the Mughal empire from Humayun and ruled between 1538 and 1545, is known for investing in building up infrastructure in the form of the Grand Trunk Road and the introduction of rupee as a currency, the development the postal system apart from other efforts to improve the administrative capacity. His efforts had a far-reaching impact on raising India’s productivity and it is for this reason that Humayun, his arch-enemy, called him “Ustad-e-Badshahan” (Teacher of Kings).
Now, at this current juncture, the Indian government — much like Asaf-ud-Daula — needs to provide immediate relief in the form of expanding rural employment guarantee scheme and, some argue, introducing an urban employment guarantee scheme as well as more direct cash transfers to the poor.
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But the multiplier effect of such expenditure is very small (see Table below; source: RBI). The multiplier effect refers to the factor by which the GDP goes up when the government spends Rs 1.
For achieving rapid growth at a sustainable rate, India needs the government to invest in raising the productive capacity of the economy. The multiplier for that is much higher — especially if that capital expenditure is done by the central government.
As such, apart from the spread of Covid, what will determine the shape and form of India’s economic recovery in the coming weeks and months, will be the extent and type of government spending. It is likely that the government will have to strike a combination of the two policy approaches discussed above.
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