The first-quarter GDP growth number was on expected lines, but given the gaps in the availability of data for April and May, conjecturing the exact number was guesswork. A fall of (-) 20 per cent looked likely and though the number is a bit higher, it does not change the conclusion that the economy has slumped sharply due to the lockdown.
The contraction observed in seven of the eight sectors reflects how deep the problem is. Public administration was expected to grow at a positive rate given that the fiscal deficit was much higher in the first quarter of the current year relative to last year (83.2 per cent against 61.4 per cent). This did not happen, and the reason is quite straightforward — higher government spending was in the form of transfer payments rather than spending on goods and services, which resulted in a negative growth number. The other sectors — manufacturing and services — have been in the negative zone across the board, which again is quite expected.
Growth for the full year is likely to be in the region of (-) 6.4 per cent, which is premised on a low negative growth number for the first two quarters for certain, possibly a close to positive number in the third quarter and positive growth in the last quarter. This assumes that around three-fourths of the economy would be able to operate at a capacity utilisation rate of 65-70 per cent. The balance of 25 per cent of the economy, which would be in the services category, would probably still be struggling in the fourth quarter. Based on the first-quarter performance, these scenarios remain unchanged.
Two basic factors would influence the assumptions being made on the growth prospects for the coming quarters. The first is the process of “Unlocking”. It has been observed that with the economy moving from the stage of a total lockdown in April to a gradual opening up of the windows in May and June, and then the door opening up a little more significantly in July and August, the movement from one stage to another did reflect in the macro-economic numbers. For instance, though the PMI number for manufacturing remained in the negative terrain — being less than 50 for the first four months of the current year — it crossed the 50 mark in August. Therefore, there has been an improvement on a month-on-month basis. The same holds for the index of industrial production (IIP), which though negative in the first three months, has witnessed less intensity: From (-) 57.6 per cent in April to (-) 33.9 per cent in May and then (-) 16.6 per cent in June. This is in line with the opening up of activities across the country.
While it is reasonable to assume that the “Unlock” process will be positive for the economic sectors, there is no assurance that there will not be localised lockdowns, as the course of the pandemic is unknown. The Centre has made strong statements on this issue, but the states could end up taking specific decisions. This affects economic activity as supply chains, which span the entire country, get impacted sharply. Also, business units are not confident about starting or expanding their business.
For services, the issue is clear. Most services involve social interaction and thus following distancing norms is always going to be a challenge. Hence, completely opening up services like hotels, transport (airlines and railways), tourism, and entertainment would be low on the list of opening up and thus recovery of output in these areas would be sluggish.
In real estate, which is an integral part of the services segment, there are multiple sets of challenges — one of which is “real”, while the other is a change in the mindset. For construction activity to begin, there need to be projects and labour on the supply side, and demand. The present stress on home loans can hinder a revival in residential real estate. The work-from-home ethic has caught on. The thinking today is that this can be a trend in the future and will affect demand for property and leases. Putting these factors together, the revival of the services sector would be prolonged as compared to manufacturing.
The second factor which will play a role in the economy’s growth prospects in the coming months is the possibility of a revival package from the government. There have been some hints given by officials that something could be on the cards. This can be a course changer for the growth trajectory. So far, support from the government has been more through the indirect route, where food relief for the poor has been combined with more aggressive lending by the financial system with guarantees in different forms. To boost growth presently, there should ideally be some additional capital expenditure by the government which goes beyond what has been provided in the budget. This seems to be the logical solution as the first quarter GDP numbers show a decline in both consumption and investment. By increasing capex, the government can begin a virtuous cycle of creating assets as well as providing employment. This will create a dual impact on the economy.
Overall, economic growth would be in the negative terrain in the near future, though the pace of the decline will ease. This will be contingent on how soon the unlocking process reaches the state where the pre-COVID situation is restored. Reaching the same threshold looks unlikely given the spread of the virus and moving to the positive growth zone may be possible only in the fourth quarter. There is definitely a possibility of the (-) 6.4 per cent number being revised further downwards depending on the evolving conditions. But the government can certainly make a difference by altering its stance on fiscal policy, going in for some pump-priming. It may not be too late even now.
This article appeared in the print edition on September 4, 2020 under the title ‘Slipping into negative terrain’. The writer is chief economist, CARE Ratings. Views are personal.