Things will now only look up. But there's a catch

By Mythili Bhusnurmath Whichever way you look at it, GDP data for the first quarter (April-June 2020) of the current fiscal is unambiguously bad. Barring agriculture, which grew 3.4%, every other sector contracted. Construction halved, trade was almost as bad at –47%, manufacturing declined 39.3% and, in the unkindest cut of all, public administration (a proxy for government expenditure) declined 10.3%. Not surprisingly, GDP contracted an unprecedented 23.9%, the worst quarterly growth, not only since the Central Statistical Organisation (CSO) began publishing quarterly GDP numbers in the mid-1990s, but in living memory.Given the scale of the disruption in economic activity caused by the Covid-19 pandemic, the poor show was not unexpected. The debate, in any case, was never about whether GDP would contract, but about the extent of contraction. Would Indiafollow in the footsteps of Britain, which recorded a 20.4% decline, the worst quarterly performance since record-keeping began in 1955? Or would it be a more modest decline like Indonesia’s (5.32%)? In the event, we ended up far worse than Britain andmany emerging markets.Not only is the decline across the board, but what is particularly distressing — and inexplicable — is the decline in public administration, a sector that should have grown and provided succour to the economy at times like this. Given that GoI hascompleted almost 90% of its budgeted borrowing for the year, CSO’s numbers seem to suggest government is cutting back, rather than increasing, its spending.Add to that RBI’s warning in its annual report published last week that the uptick in economic activity visible in May and June appears to have lost strength in July and August, suggesting the contraction in economic activity will continue in Q2, and theoutlook is undeniably bleak.Sailing in the Same BoatIt is little consolation that barring China — which seems to have defied the global collapse and reported a growth of 3.2% in the June quarter—every major economy has contracted. While some like Britain have slipped into recession (defined as two consecutive quarters decline in GDP), Japan, the world’s third-largest economy, saw GDP decline for the third successive quarter. Emerging market economies fared no better. On a seasonally adjusted, quarterly basis, the Thai economy contracted 9.7%, Malaysia reported a 13.2% contraction, Singapore’s and the Philippines’ economy shrank 13.2% and 16.5% respectively.So, is there no silver lining at all?There is, and more than one. Lest I be accused of clutching at straws, let me elaborate. For one, this should mark the nadir in terms of growth.As we unlock more and more, activity will pick up. Of course, growth will be at snail’s pace and will not be linear. But, overall, each month will be better than the previous.That’s not all. Among emerging market economies, we are in the enviable position of not having exhausted our fiscal firepower. On the contrary. The August update of the International Monetary Fund’s (IMF) tracker of government responses to Covid-19 (bit.ly/3lyF9mi) in 196 countries shows India is among the most conservative. Sure, fiscal deficit at the consolidated level (Union plus states) is high — it has already crossed the budget estimate for the year as a whole by July 2020 — as is the debt-GDP ratio.But the overwhelming share of our debt is financed by domestic, not external, borrowing. Unlike South American and Southeast Asian economies, where dependence on overseas financing of public debt makes them vulnerable to the whims and facies of fickle investors.Even better, the shift in the US Federal Reserve’s focus to growth and employment, rather than inflation, means RBI can safely assume thed’s easy money policy will continue and put aside inflation fears. Yes, consumer price inflation (6.93% inJuly 2020) is well over the 6% upper band of RBI’s inflation target.But this is largely driven by food inflation (the result of supply-chain disruptions caused by the lockdown). With wholesale prices declining, RBI can afford to look through the higher inflation, take a leaf from the Fed’s books, and not get overlyfixated about inflation — a path it has already embarked upon going by its latest announcement on aggressive open market operations.But this is not a battle RBI can win on its own. The government must play its role. Apart from agriculture, the only sector that could shore up the economy — no prizes for guessing — is public administration, a.k.a. government expenditure. Govern-ment spending on infrastructure could kill two birds with one stone. It would provide a boost to the construction sector even as it creates assets, jobs and incomes.When Opportunity StrikesThe hope is that GoI will now realise it needs to step up to the plate. Sanjeev Sanyal, principal economic adviser, finance ministry, admitted as much, adding, ‘We are now in the position of pushing the accelerator.’ Hopefully, Monday’s dismal GDP numbers will be the final wake-up call.Clearly, there is still space on both the monetary and fiscal side, more on the latter than the former. It is for us (read: GoI) to make use of it. To paraphrase Shakespeare, if we fail to exploit the space to support the economy during this once-in-a-lifetimecrisis, the fault, dear reader, is not in our stars but in ourselves.

from Economic Times https://ift.tt/3jwwizT