Steady decline in India’s economic growth

By Roshan Kishore

Even before the pandemic hit India, the economy was in one of its worst-ever deceleration phases

NEW DELHI : The Indian economy was in one of its worst ever deceleration phases even before the Covid-19 pandemic. GDP growth fell continuously for eight quarters (except for a .08 percentage point blip between December 2018 and March 2019. It was 8.2% in March 2018 and had fallen to just 3.1% in March 2020. March saw just a week of the lockdown (which would eventually last 68 days, albeit with some relaxations).

Even before the full force of the pandemic hit India (which was really in April-June quarter in terms of livelihoods; and July onwards in terms of lives with both cases and deaths rising), the slowdown was already worse than the one the Indian economy went through in 2011-12.

Back then, quarterly GDP growth fell from 10.3% in March 2011 to 4.9% in June 2012. However, the economy started recovering after 2011-12. Annual GDP growth fell from 8.5% in 2010-11 to 5.2% in 2011-12. This contraction was followed by a sharp recovery until 2016-17. This has not been the case this time and GDP growth has been falling continuously since 2017-18. (See Chart 1)

Both current and future drivers of growth collapsed Consumption demand is the biggest driver of economic growth in India. In 2019-20, Private Final Consumption Expenditure (PFCE) had a share of 57% in India’s GDP. PFCE growth collapsed to 2.7% in the March 2020 quarter, the lowest since June 2012. Given the strengthening headwinds to consumption demand, firms started shelving investment plans. This can be seen in Gross Fixed Capital Formation (GFCF) contracting at an increasing rate for three consecutive quarters ending March 2020. A collapse in investment demand has adverse implications for future growth potential of the economy. It was only government expenditure which was acting as a counter-cyclical force to some extent. (See Chart 2)

Fall in nominal growth was bigger Nominal GDP growth in 2019-20 fell to just 7.2%, the lowest since 1975-76. The 2019-20 Union Budget assumed a 12% nominal growth. Nominal GDP is crucial for revenue collections, as taxes are a fraction of nominal incomes. The sharp fall in nominal growth was a big reason for a huge shortfall in tax collections in 2019-20. According to data from the Controller General of Accounts, which works under the ministry of finance, gross tax revenue collections were just 81.6% of the budget estimates in 2019-20, the lowest since 2000-01.

To be sure, the Corporate tax cut announced in September 2019 and the overall slowdown in the economy exacerbated matters on the revenue collection front.

The contraction affected the entire non-farm economy including the government sector

NEW DELHI : India’s GDP contracted by 23.9% in the April-June quarter this year compared to the same period last year. This suggests that the lockdown’s toll on economic activity has been more severe than expected.

A Bloomberg poll of 15 economists expected the contraction to be 19.2%. India was under an almost complete lockdown for the months of April and May.

The lockdown was not the problem, but it is the manner in which it was implemented and the policy response which has followed that have made things worse, said experts.

To be sure, the GDP numbers released on Monday are only the first estimates and they could be revised downwards further.

This is because, the informal sector numbers, which are likely to have suffered more, will only become available at a later stage, Pranab Sen, India’s former chief statistician said.

The economic contraction has affected the entire non-farm economy including the government sector. Agriculture was the only silver lining with a growth of 3.4%.

Gross Value Added (GVA), which measures the value of production minus taxes contracted by 22.8%.

Even the Public Administration, Defence and Other Services sub-sector, which captures spending by the government, has contracted by 10.3%.

The contraction in government spending will only increase going forward as state governments are facing a severe resource crunch, said Himanshu, associate professor of economics at Jawaharlal Nehru University.

This will only complicate the recovery going forward, he added. (See Chart 1)

The expenditure side numbers suggest that both consumption and investment demand collapsed during the lockdown. Private Final Consumption Expenditure contracted by 26.7%.

Gross fixed capital formation, which measures investment, suffered a contraction of 47.1%.Government Consumption Expenditure, however, grew by 16.4%.

Even nominal GDP contracted by 22.6%, which means that the base of tax collection will shrink.

‘The fact that wholesale price indices are in contraction mode should have left no doubt that producer prices are declining.

This is bound to show in nominal growth numbers, said Pranab Sen. (See Chart 2)

Krishnamurthy Subramanian, chief economic adviser (CEA), ministry of finance said the economic performance in the AprilJune quarter is primarily due to an exogenous shock (Covid-19 pandemic) that has been felt globally, and India has already started a V-shaped recovery after the lockdown was eased.

Crucial that state govts provide fiscal stimulus considering the collapse in consumer sentiment

NEW DELHI While lockdown restrictions have been eased significantly from July onwards, the continuous rise in the number of Covid-19 infections has led to a continuous deterioration in consumer sentiment. This was clearly seen in RBI’s latest consumer confidence survey conducted in the month of July. Given anecdotal accounts of income and job losses, this is not very surprising. The worsening economic outlook, according to experts, will generate additional headwinds for consumption demand as households increase precautionary savings (See Chart 1)

High frequency indicators also suggest that some of the recovery seen in June might have been the result of pent-up demand due to the lockdown in April and May. For example, the Purchasing Managers Index (PMI) for manufacturing fell from 47.2 in June to 46 in July.

PMI for services showed a flattening in July. It improved marginally to 34.2 from its value of 33.7 in June.

This number was 12.6 in May. A PMI value less than 50 signifies contraction in economic activity. To be sure, the index of eight core sector industries contracted at a slower pace in July (9.6%) than in June (13%). (See Chart 2)

The collapse in consumer sentiment and continuing uncertainty about production activity due to localised lockdowns makes it imperative that the governments provides a fiscal stimulus to boost the economy, said experts.

What we are witnessing is a crisis in the entire economy, so we must have a co-ordinated response.

The Centre has not played its part in leading on this front, said Pranab Sen, India’s former chief statistician.

While it is important that the fiscal response is timed well and distributed carefully across sectors to achieve the maximum impact, the Centre must come out with a clear road map to boost sentiment without delay, he added.

Prospects of a co-ordinated fiscal stimulus will become difficult given the disproportionate hit to finances of state governments.

Finance minister Nirmala Sitharaman said last week that the GST Council expected a shortfall of ₹2.35 lakh crore in GST compensation cess collections in the current fiscal year.

The states can borrow ₹97,000 crore out of this amount as an interest free loan, but they will have to pay interest if they want to borrow the entire amount , the Centre has said.

State government expenditure was 1.5 times the money spent by the Centre in 2019-20, according to Centre for Monitoring Indian Economy’s database.