On 31st August, the National Statistical Office (NSO) came out with the provisional estimate of the GDP. According to this, the GDP shrunk by 23.9% during April, May and June as compared with the first quarter of the last financial year (2019-20). Aggregate private final consumption expenditure contracted 26.7% and investment (including gross fixed capital formation, change in stock and valuables) 47.5%. Private consumption and investment usually constitute more than 90% of our GDP – these two together registered a growth rate of minus 34.7%, according to the NSO.
If 90% of the economy shrinks by 35%, then how is the overall GDP declining by less than 24%? Well, the current account balance (export minus import) has improved by 164.5% and government (final consumption) expenditure has increased by over 20% (at current prices). Exports declined during the lockdown but imports fell at a higher rate because of the lower level of activity. Resultantly, the current account deficit (of Q1 of last year) of Rs 1,94,300 crore has become a current account surplus of Rs 78,300 crore at current prices.
As the GDP is measured by adding consumption, investment, government expenditure and current account balance (CAB), the improvement in CAB contributed to relatively lower GDP growth numbers. We have to take the over 20% increase in nominal government final consumption expenditure with a pinch of salt. Also, according to the Controller General of Accounts, revenue expenditure increased 10% and total expenditure was up 13% for the Union government. That means State governments’ expenditure must have gone up by around 30% (as States spend more than 50% of total government expenditure in India) in Q1 of this fiscal, which is difficult to digest. However, this is the official explanation.
As far as the sectoral growth is concerned, for the primary sector, including agriculture, forestry, fishing, mining and quarrying, the estimated growth rate is minus 1.3%. It’s assumed that agriculture grew at 3.4%, higher than last year’s 3%, owing to good harvest. However, farmers have complained that they faced huge problems in marketing their products during the first three months of the lockdown. If products could not be sold in the market, that would not be incorporated in the GDP calculations. So, 3.4% growth rate in agriculture could be an overestimation.
The secondary sector, including manufacturing, construction and electricity, gas, water supply, registered minus 40%. Within this, manufacturing is estimated to be minus 39% and construction minus 50%. The basis of the manufacturing growth rate is the Index of Industrial Production and the share market data (BSE/NSE) for the corporate sector.
Clearly, unorganised manufacturing, where over 90% of the workforce is engaged in, is missing. The same growth rate has been assumed for the unorganised sector as well due to lack of information. Even within organised manufacturing, sales of commercial vehicles stood at minus 85%. So the manufacturing growth rate, including both organised and unorganised, would be definitely much lower than minus 39%. Construction activities almost stopped during these months, therefore, minus 50% is again an underestimation.
The tertiary or service sector reported minus 20.5%. Trade, hotel, transport, communication and broadcasting sector saw minus 47%, which is again doubtful because it is difficult to believe that more than 50% hotels, restaurants, transport, etc were operating in a full-fledged manner during this period. Financial, real estate and professional services shrunk only by 5%. This is again unbelievable. So, in all the sectors, the actual growth rates would be much lower than these provisional numbers. On average, the Q1 GDP must have shrunk by 40-50%.
The initial quarterly estimates (revised estimates come later) have a lot of limitations because of unavailability of detailed data on all the sub-sectors. However, these quick estimates are important for policy formulation.
We have not witnessed negative growth rate in India after 1979 (minus 5%). Therefore, the NSO numbers are scary and the actual situation is likely to be even worse.
What is to be done?
Now, the question is what is to be done? There is a requirement of a big demand-side push by providing substantially large expenditure side fiscal stimulus to revive the economy. But, the government exchequer is in an extremely tight situation. The government has said on record that they are not in a position to transfer States’ money on account of GST. Fiscal space for the State governments has also shrunk on the face of huge revenue loss. Income and profit have declined due to the lockdown and transaction and consumption have also suffered badly – affecting both direct and indirect tax revenues. So, how to finance fiscal stimulus?
Well, government finance should not be compared to household finance. The government can print money or, in other words, the government can always borrow from the central bank, which is called monetisation. There is no fear of demand-pull inflation now under severe demand depression. The RBI is sitting on a huge foreign exchange reserve of $537 billion (as on Aug 21) or more than Rs 40 lakh crore or 20% of the GDP of 2019-20. The Union government can always take short-term loan from the RBI in this crisis and spend liberally and transfer more money to the States.
There is a need for frontloading of government expenditures in the sense that planned expenditures of the next four-five years have to be incurred within this year or the next to give the economy a big push. Otherwise, it would take at least 4-5 years for the economy to return to ‘business as usual’ after this huge negative shock.
If the government does not want to expand fiscal deficit now and behaves in a conservative manner, recovery would be slower, business expectations would be depressed, market would remain down and unemployment would rise. Future revenue receipts of the government would also be lower, and the fiscal space would further shrink. On the other hand, if the government enhances expenditure substantially by deficit financing, growth and level of aggregate employment would revive soon. Revenue flow would be better and fiscal deficit as a proportion to the GDP would automatically come down. Hope sanity prevails!
(The author is Assistant Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi)
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