The grave warning

INDIA’S ECONOMY GREW at a paltry 3.1 per cent in the quarter ended March 2020, the lowest in 44 quarters. One thing that makes this gradual slowdown more serious than the ones experienced before is that it came without any external shock. Also, the data shows the slump has covered all the sectors. Manufacturing is weakening, as is the jobgenerating construction sector (chart 1).

Agriculture and public spending are the only green shoots of the economy, and the concentration of the slowdown in the core economy is becoming sharper (chart 2). Core GVA is the gross value added in the economy without that in the farm sector and public administration. Consumer spending grew at 2.7 per cent in the March quarter, while investments contracted for a third straight month, falling faster than the preceding quarter every time (chart 3).

The data also showed the economy grew slower than initially estimated in the first half of the fiscal year 2019-20. For example, the output from construction activities in Q1FY20 was 6 per cent lower than what it had been estimated (chart 4) in November 2019. The economic slump, which began after demonetisation and implementation of the GST, has shown no signs of recovery until the end of FY20 (chart 5). The Covid economic shock would play over and above this pre-existing slowdown.

Slowing of growth has had a definite impact on the Centre’s revenues, but revenue spending, most of which is salaries, pensions and interest payments, has grown massively (chart 6). Capital expenditure has grown slower over years. While the gap between capex and fiscal deficit was narrowing till FY17, it blew out of proportions in FY20. Fiscal deficit neared ~10 trillion last year, and its quality deteriorated (chart 7). These underline the limitations the Centre faces in giving a direct stimulus to the economy.