India was not in the pink of economic health in 2019-20. First Estimates of 2019-20 announced on 29 May confirmed this. India grew barely by 4 per cent for the year which happens to be the lowest growth rate in last 11 years.
In one of the most impulsive decisions taken, India was placed under a 21-day lockdown virtually without any notice or warning on 24 March 2020. A hundred and thirty-five crore Indians got locked-up in their homes or wherever they were stranded on the evening of 24 March. Millions of businesses, producing goods and services, barring the ‘essential goods’ were locked-down. The lockdown rendered over 10 crore workers jobless overnight; many of them started walking hundreds of kilometres to the ‘safety’ of their rural homes. India’s lockdown strategy was faulty. The lockdown was imposed under a naive belief that India would be able to eliminate Covid-19 from the face of India in three weeks’ time. India decided to use the brahmastra — total economic and human lockdown — on the entire country when only a tiny part was infected.
Lockdown 1 and 2 (entire month of April) turned out to be extremely severe, though agriculture and government expenditure, which constitute about 25 per cent of GVA (Gross Value Added), remained almost unaffected. As 70 per cent of the remaining economy remained shuttered, about 50 per cent of monthly GDP output was lost in April. Lockdown 3 (first half of May) opened up India a little bit. Lockdown 4 (second half of May) allowed many productive activities to commence. Yet, India would lose about 40 per cent of monthly output in May as well.
Following Prime Minister’s announcement of a Rs 20 lakh crore Stimulus Package on 12 May, Finance Minister revealed the package in five instalments over next five days (13-17 May). This package was costed at Rs 20.97 lakh crore or Rs 21 lakh crore on the final day of announcements. It included 26 March package and also various liquidity measures taken by the RBI. It also included some releases made from existing budget for supporting health infrastructure and for meeting disaster relief arrangements.
The Rs 21-lakh crore package is a mish-mash of five kinds of interventions — liquidity measures by the RBI, liquidity measures by the Government, fiscal support measures by the Government, credit support to businesses and other measures in the nature of intent of future investments and expenditures to be incurred by others.
While quite late compared to other Central Banks, RBI was off the block in the last week of March to announce a slew of liquidity measures which, as claimed by the Finance Minister in her presentations, added up to Rs 8.1 lakh crore.
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RBI liquidity measures were aimed at encouraging, even forcing, the banks to lend and to buy corporate bonds. As these measures did not take into account massive credit risk averseness of banking system and absolute inability of the businesses to take credit in the lockdown, the liquidity bazooka proved a damp squib. The banks availed very little of the liquidity measures offered by RBI. On the contrary, they increased their Reverse Repo deposits with RBI to unprecedented levels of Rs 7.5 lakh crore (higher than post demonetisation liquidity).
The Government followed up with its own set of liquidity measures totalling to Rs 4.45 lakh crore. These were based on guarantee support from the Government and additional liquidity by the Central Financial Institutions like NABARD. All these measures are riddled with many ifs and buts and rely on unfounded hopes of an unprecedented performance by the financial institutions. MSMEs credit flow, following normal growth and suasion of government might lead to credit flows of about Rs 1.5 lakh crore. Rest of the liquidity measures may remain on paper.
A fiscal stimulus measure should usually result into expansion of government expenditure. A close examination of Rs 21-lakh crore economic stimulus package suggests that fiscal measures amount to only Rs 1.45 lakh crore (or about 0.7 per cent of GDP). Lot of hopes were raised when the Prime Minister announced Rs 20 lakh crore package. However, in the end, the government chose not to rock the fiscal boat.
There were three credit stimulus measures of Rs 3.25 lakh crore in the Aatm Nirbhar package — Rs 3 lakh crore credit facility for standard MSMEs, a Rs 20,000 crore credit facility for non-performing MSMEs and a Rs 5,000 crore credit facility for street vendors. Total outstanding credit to Micro and Small Enterprises is about Rs 15 lakh crore.
A Million-dollar question is whether the banks would really lend to the MSEs. Credit policy is the responsibility of RBI. It is strange that credit package came from the Government. The MSME credit package relies on government guarantees. It is unlikely that the private sector banks would fall for this. It is only the PSBs which might deliver something under this package. The directed credit with the bait of guarantee might drive the last nail in the coffin of PSBs.
The remaining package totalling Rs 3.8 lakh crore comprising three types of interventions — intent to invest in agriculture infrastructure and MSMEs, some measures already part of the budget and the measures which parties other than the Government of India were expected to carryout. Five measures totalling Rs 1.295 lakh crore constituted government’s intent to make investment in agriculture and allied sector infrastructure, including a Rs 1 lakh crore Agri Infrastructure Fund to build farm-gate infrastructure. For MSMEs, the Government announced a Rs 50 thousand crore Fund of Funds. There are two schemes — Matsya Sampada Yojana and Viability Gap Funding Scheme for which their lifetime outlays were announced as part of the stimulus package.
The fiscal stimulus measures announced would at best cost Government Rs 1.5 lakh crore. The Government is attempting to save more amount than this by controlling expenditures. The government may end up the year 2020-21 without expanding expenditures at all. A Rs 21 lakh crore stimulus delivered without costing anything to the Government!
GDP matters as all the three factors of production — workers, capital and government — receive their income — wages, profits and taxes — from the value added produced in businesses. The task of assessing likely 2020-21 GDP performance is indeed not only a difficult exercise but there are also lot of unknowns.
The Gross Value Added (GVA) from the supply side falls broadly in three groups. First group of agriculture and allied sector makes up about 15 per cent of India’s GVA and government services, which also amounts to about 15 per cent of GVA, have largely remained unaffected and are likely to see no contraction in 2020-21.
Industrial goods, mining goods, construction and utilities together form about 40 per cent of GVA. Barring a few essential goods and some continuous processing industries and utilities almost every business in this group was down and out in April.
For the year as a whole, this group contributing about 40 per cent of India’s GDP is expected to suffer about 15-20 per cent loss of GVA. Remaining services — trade and commerce, transportation, financial, and hospitality etc. — makes up another about 40 per cent of India’s GVA.
As trade and commerce and financial services make up about 2/3rd of the services in this group and these are likely to return normal performance for the year and transportation and hospitality services would be severely disrupted, it will be fair to estimate that about 8-10 per cent of the GVA in this group would get lost in the year 2020-21. Putting the sum of parts together, supply side dynamics seem to suggest that India’s GDP will contract by about 10-12 per cent for the financial year as a whole.
There are three primary contributors to the GDP from demand/expenditure side — private consumption, government consumption and investment which contribute approximately 58 per cent, 13 per cent and 29 per cent of GDP. It looks likely that capital formation growth would decline by 15-20 per cent in the current year. Assuming that the Government would be able to keep its expenditure at BE levels, the government expenditure which is about 13-14 per cent of GDP should grow by about 10 per cent.
Private consumption has two major parts — essential consumption and discretionary consumption. Essential consumption — food, medical, gas, water and electricity etc. — makes up about 70 per cent of the total consumption or about 40 per cent of GDP. Discretionary expenditure — travel, entertainment, restaurants etc. — makes up for about 20 per cent of GDP.
The essential consumption may stay flat during the year. Discretionary expenditure which suffered substantial setback in last two months and may not achieve normal level during the entire year may make discretionary expenditure contract by about 25-30 per cent for the year as a whole. Putting all these together, India is likely to see about 8-12 per cent contraction from the demand side as well.
There are three real factors of production — labour, capital and government. They share the GDP income. They benefit when GDP grows. Their incomes enlarge, may be in varying proportions, when GDP grows. They also suffer when GDP contracts.
About 65 per cent of GDP income accrues to workers — the largest factor of production and the largest factor of consumption. Roughly about 20 per cent of India’s GDP services the capital. Remaining 15 per cent is the share of governments. The state of play suggests that the government would bear about 25 per cent of the loss of GDP income of Rs 20 lakh crore i.e. a total loss of about Rs 5 lakh crore. The capital may get away with a loss of not more than 10 per cent of total income loss i.e. about Rs 1 lakh crore. The workers would bear the rest of it — a whopping loss of about Rs 14-15 lakh crore in the year 2020-21.
It is certain that India’s GDP will contract after 40 years in 2020-21. It also appears fairly certain that this would be a very large contraction — of about 10 per cent of GDP or loss of about Rs 20 lakh crore of income. The nominal fiscal package of Rs 21 lakh crore is actually of only Rs 1.4 – 1.5 lakh crore or about 0.7 per cent of GDP.
While the strategy of Government may succeed in not allowing fiscal deficit to expand on account of expenditure stimulus, but the big hole on revenue side and off-budget expenditures will make central government fiscal expenditure go beyond 7 per cent in 2020-21. Every factor of production will suffer — the workers most.
2020-21 will go down in the history of India as the year when India got way-laid from its story of three decadal outstanding growth.
This article was republished from Subhash Chandra Garg’s blog.
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