The economic data for 2QFY20 will be released today evening by
the Central Statistics Office (CSO). There is a near consensus that this data
may not be good. The estimates of various agencies and institutions are ranging
between 4% to 4.8% growth in real GDP over 2QFY19 (vs. 5% in 1QFY20). 2QFY20 is
expected to be the sixth straight quarter of decline in growth rate, the
longest span of decline since 2011-2012.
Since this data belongs to the quarter ended September 2019 and
the financial performance of the businesses for that quarter is already in the
public domain, it is reasonable to assume that the financial markets have
assimilated the poor growth numbers quite well. However, the growth estimates for
corporate revenue and profit for 2HFY20 may not be factoring a negative
surprise.
Going by the forecasts of most analysts and economists, the
growth estimates of 2HFY20 are not very encouraging; though the consensus is
expecting the second half of the year to be better than the first half. It is
estimated that the measures taken by the government to stimulate the growth,
lower lending and tax rates, likely bumper Kharif crop, low base effect,
inventory rebuilding in key sectors like automobile, cement, steel etc., shall
have positive impact on the 2HFY20 data. The overall FY20 growth is expected to
be in the range of 5.4 to 5.8%, implying a growth rate of ~6.5% in 2HFY20.
The non-profit think National Council of Applied Economic
Research (NCAER) recently released its mid-year review
of India’s growth prospects. NCAER has presented the lowest estimates so far,
forecasting that the economy will grow at just 4.9% in the financial year
2019-20.
India may therefore lose the claim of "fastest growing
economy" in next six months. The statement made by the finance minister in
the parliament on Wednesday clearly indicates that the government is not
oblivious to this fact. That is perhaps why the finance minister changed the
narrative from the usual "slow but still the fastest growing" to
"slow but no recession" (see
here).
A section of commentators is insisting that on ground the Indian
economy may already be witnessing a shallow recession. (see here,
here,
and here)
Even if we ignore these rather pessimistic opinions, one thing
is clear - the impact of slowdown is highly skewed. The lower and middle
socio-economic strata, which consist of over 70% of the population is facing
recession like conditions. This is adequately reflected in (i) consistently
falling private consumption since 3QFY18; (ii) shrinking household savings and
(iii) rising household debt. The rich who form less than 10% of the population
are contributing more than 50% of the growth.
Under these circumstances, the economic policy response, in my
view, must be non conventional. A gradual, piecemeal stimulation may not be
effective in these circumstances, which in fact has been the case in past one
year. The response has to be immediate, accelerated, and massive. The policy
makers need to acknowledge the situation as an economic emergency and
accordingly use exceptional methods.
For example, instead of caring excessively about the fiscal
deficit at this point in time, the government must consider a classical
Keynesian response. Similarly, the monetary policy response also needs to be
dramatic. This incremental 25-35bps rate cuts may not bear the desired impact.
A sharp rate cut 100-125bps with rationalization of USDINR and REER may be
necessary. Negative real rates, competitive exports and incentive to borrow
& invest.
The proposal to initiate a TRAP like program is welcome. But the
bureaucracy must be sanitized to make sure that the effort must be "how
the coverage of such an initiative could be maximized" rather than
minimized as the case has been tax rate cuts and real estate rescue plan.
No comments:
Post a Comment