‘‘What is necessary for livelihood and what is necessary for addressing the issue of pandemic does not deserve the kind of constraints which the FRBM places. Certainly, this is the time for forbearance, not rigid adherence to fiscal rectitude”
– N K Singh, Chairman, 15th Finance Commission and FRBM Roadmap Committee
A drastic contraction of 23.9% in quarterly GDP has taken our economy to FY 2014 quarterly levels. With COVID - 19 cases continuing to soar, and no new fiscal stimulus announced by the Government, our economy’s short-term decline is set to continue in the foreseeable future.
The pandemic’s ‘peak’ that our government was expecting to reach by now, remains elusive. Making matters worse for the economy is that 5 large states that contribute ~40% of our GDP – Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, and Gujarat – are those where >50% confirmed cases of COVID - 19 remain concentrated as on date. The pandemic has also reached India’s rural areas, of the districts with over 1,000 cases, almost half were in rural areas, up from 20% in June, raising concerns.
The problem is a slump in aggregate demand with its repercussions on both the manufacturing and the services sectors and consequent job losses. Services industry contributed >55% to India’s GVA, in FY 2020 and 2019, and employed 31.5%of our workforce. With services and manufacturing sector experiencing a grinding halt for last ~ 4 months, most of the job losses of 85 million have been in these sectors. Most importantly, manufacturing is expected to remain in the negative domain till the 4th quarter of FY 2021. Construction activities, including real estate bore the severest brunt of the prolonged lockdown. Even today, it remains far from its pre-Covid-19 level due to labour shortages, slump in demand for both residential and commercial real estate, and re-assessment of capex plans by corporates in light of weakened aggregate demand. Within the services sector travel, tourism, and hospitality have been the most hit.
Our exports and imports fell by almost 20% and 40% respectively. This implies that our domestic demand was worse hit than our overseas demand. This probably explains why India has witnessed the steepest GDP contraction among G-20 economies as per latest data. A small bright spot was that our trade imbalance turned positive and contributed 2.8 per cent to our GDP, instead of shaving off a part of the GDP that it traditionally does.
In the middle of this bleak outlook, one bright spot is the agriculture sector. Often neglected by and paid lip – service by policy makers, our rural economy is expected to grow by 2.5% - 3% depending on the range of estimates provided by several forecasting and rating agencies. Agricultural GVA rose 3.4% in the half year ending September, owing to a bumper Rabi crop and record procurement by FCI and other state players. Still, good performance of agriculture has not been able to save overall consumption demand from a double-digit contraction as other sectors were in the negative. Disposable incomes have also taken a hit as retail inflation continues to be high at 6.69% in August and is expected to inch up.
All these indicators point to a continuing slump in the economy. In order to raise aggregate demand, it will, therefore, be imperative for the government to consider allowing most economic activities to resume with adequate safety measures in addition to amending its strict adherence to FRBM parameters. We believe that strict adherence to the FRBM law may not be feasible and it is the time to bring flexibility without “impairing” overall fiscal consolidation. GoI may need to follow a “range” on issues of fiscal deficit and debt levels, instead of the fixed targets currently prescribed. Following a range on fiscal parameters will provide the GoI some flexibility depending on the evolving macroeconomic situation.