The growth of real Gross Domestic Product (GDP) had already started sliding from the third quarter of FY 2018-19 and continued all through the FY 2019-20 culminating in a low of 3% during its last quarter ending March 31, 2020. During the whole of 2019-20, the growth plummeted to a decade low of 4.2% down from an average of 7.5% recorded in the previous 5 years i.e. 2014-15 to 2018-19.
A nation-wide lockdown announced by the Prime Minister, Narendra Modi on March 24, 2020 dwelt a body blow by bringing most of the economic activities to a grinding halt. As a result, there was precipitous decline in GDP growth by 24% during the first quarter of current FY ending June 30, 2020. The slide continued during the second quarter ending September 30, 2020 though, the de-growth was modest at 7.5% (courtesy, graded exit from lockdown).
While, we need to wait for a while before the numbers for the third quarter are released, the initial indications in particular, the increase in index of industrial production (IIP) by 3.6% during October, 2020 (on top of 0.4% rise during September, 2020) – with manufacturing and electricity showing good rebound – point towards a recovery which could gather momentum during the fourth quarter. The improved sentiment has prompted several agencies to revise their growth assessment for the whole year from minus 9.5% – 10.5% earlier to 7.5% – 8.5% now.
For FY 2021-22, when the impact of pandemic is expected to fully subside more so with the availability of the vaccine (at the beginning of the year hopefully, the possibility of giving shots to the public at large -albeit in the non-priority category – is very high), generally agencies are projecting growth to be a minimum of 7% even as some experts are anticipating it to cross 10% mark. However, the crucial point is: even if the growth rebounds to the 7% – 10% range, the resultant GDP would have merely recuperated to the 2019-20 level or about Rs 14500,000 crore or US$ 2.1 trillion.
The Union Budget for 2020-21 was prepared with an overarching focus on making India a US$ 5 trillion economy by 2024-25 – a target that Modi set at the start of his second inning (May, 2019). To reach there, the economy needed to grow close to 20% per annum consistently over a period of 5 years – a rate never seen before even in a single year. It was totally unrealistic. Now, with set-back of 2019-20 and 2020-21 and India likely to remain stuck at US$ 2.1 trillion during 2021-22, the target of US$ 5 trillion by 2024-25 is day dreaming.
For now, we need to analyze as to what is behind the slow down during these two years apart from Covid – 19 impact. The two determinants of growth are demand (includes private consumption, government demand and exports) and investment. During 2019-20, thanks to massive loss of jobs and declining income, even as private consumption suffered, increase in government spending failed to offset this loss. A number of fiscal measures announced by the Finance Minister, Nirmala Sitharaman in August/September 2019 (steep reduction in corporate tax, tax refund to exporters, sops for real estate sector, support to housing finance companies etc) besides monetary policy support including reduction in repo rate (interest rate at which RBI lends to banks) by 1.35% failed to provide the required demand boost.
During 2020-21, both the Reserve Bank of India (RBI) and Union Government unleashed their fire power to counter the effect of pandemic. While, the former gave another dose of cut in repo rate by 1.15% and injected mammoth liquidity of close to Rs 8,00,000 crore (through measures like reduction in cash reserve ratio (CRR), auction of Targeted Long-Term Repo Operations (TLTRO) etc announced on March 27/April 17, 2020), besides granting six month moratorium on repayment of banks loans, the latter came up with stimulus packages announced by Sitharaman in three tranches (on May 13-17, 2020; October 12, 2020 and November 12, 2020).
These packages inter alia targeted MSMEs (micro, small and medium enterprises), NBFCs (non-bank finance companies), power distribution companies (PDCs), migrant labor, agricultural credit and lower middle class, agriculture infrastructure and farm reforms, structural reforms in coal, minerals, civil aviation, defense, fertilizers and MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), health and State Governments’ resources and public sector reforms. Together with RBI support (including On-tap TLTROs of Rs 1,00,000 crore announced on October 11), these add to a grand total of nearly Rs 30 lakh crore or 15% of the GDP.
All of the above is in addition to demand boosters announced in the Budget presented on February 1, 2020. Those included inter alia changes in personal income tax to leave more money in the hands of individual assesses; abolition of dividend distribution tax (DDT); concessions for MSMEs (including innovative steps for timely payment of their dues and increase in financing especially through “invoice financing”), start-ups, exporters and real estate sector;
Given the canvass of the reforms/measures and the ‘seemingly’ large quantum of money promised for all affected segments, it is only natural to expect rebound of the economy with a big bang after the impact of pandemic is reduced and eventually dissipated. However, it is necessary to take a pragmatic view based on an objective assessment of how many of the above policy announcements and measures have been para-trooped or operationalized on ground zero.
First, in several areas, the government has merely camouflaged expenses on existing schemes under stimulus package; for instance, Rs 75,000 crore under PM KISAN (under it, Rs 6000/- is given to each farmer annually to enable him buy agri-inputs such as fertilizers, seeds etc); Rs 90,000 crore to power distribution companies (PDCs) to enable them clear their pending dues to power generators; Rs 65,000 crore to clear pending subsidy dues to fertilizer manufacturers etc.
Second, of the total package Rs 3000,000 crore, the actual outgo by way of budgetary support is just about Rs 400,000 crore. Even out of this, a major slice Rs 150,000 crore is on providing free food 5 kg per person per month to over 80 crore persons covered under the National Food Security Act (NFSA) and one kg pulse per household to 16 crore households. Being help in kind, it does not put cash in the hands of beneficiaries; hence does not boost demand.
Third, an overwhelming share of the stimulus is in the form of loan from banks and financial institutions (FIs); for instance, Rs 300,000 crore to MSMEs or identified ‘stressed sectors’ under Emergency Credit Line Guarantee Scheme (ECLGS); loan of Rs 75,000 crore to NBFCs, housing finance companies (HFCs), micro finance institutions (MFIs); Rs 30,000 crore additional emergency working capital (upfront) to farmers for crop loans from National Bank for Agriculture and Rural Development (NABARD) etc.
The impact thereof is only to the extent these facilities are actually availed off. Here, one is reminded of the proverb ‘there’s many a slip between the cup and the lip’. Look at these numbers: under ECLGS, Rs 300,000 crore was intended to be loaned to 8 million MSMEs (that offer was made in May, 2020). Against this, only about Rs 150,000 crore has been given to 4 million such enterprises!
Fourth, the government is betting big on investment in infrastructure. Of Rs 100 lakh crore proposed over the next five years, 39% has to come from the Centre and States each (balance 22% by the private sector). This translates to Rs 800,000 crore annually by the Centre and State each. But, there is no blue print on how these resources will be garnered. Even so, given the current financial health of banks with ballooning NPAs (non-performing assets), they don’t have the wherewithal for financing on this scale.
There is too much focus on packaging but too little from the government by way of budgetary support. On the other hand, even as RBI has pumped too much money in the loan tap, the fundamentals of demand being weak, there are not many takers. Loan sanction and disbursements have also been affected due to inherent weaknesses of NBFCs (they are mostly into giving loans to MSMEs and individuals) – some of the big ones such as Dewan Housing Finance Corporation Lt (DHFCL), Infrastructure Leasing & Financial Services Limited (IL&FS) etc having gone bust.
Going forward, a big push to growth during 2021-22 could be affected by continuing vulnerabilities of banks and NBFCs, over-leveraged agencies implementing projects such as National Highway Authority of India (NHAI) and inability of the government to implement long pending reforms such as direct benefit transfer (DBT) of fertilizers and power subsidy, land reforms, agri-reforms, enforcement of contracts, elimination of bureaucratic red-tape, removing bottlenecks in transportation and clearances at the ports etc.