The 4QFY20 economic data has again highlighted the points, I
have been emphasizing for past many quarters, which is-
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(i) The economic growth in India has been declining structurally since the global financial crisis (GFC) of 2008-09. For couple of year, monetary and fiscal stimulus given by the extant government to mitigate the impact of global crisis supported the growth. However, post FY13, the growth trajectory never looked like retracing to pre GFC levels. A strong number in FY22 would be purely a base effect.
(ii) The long term growth
curve in India has shifted down. The potential growth in India is no longer 8%
plus. The pivot is somewhere close to 6%.
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(iii) The global
deflationary pressures are causing the nominal growth curve to shift down even
more than the real growth. It is pertinent to note that a sustained fall in
nominal growth would be new phenomenon for Indian policy makers and population
alike.
The government's budget, revenue and expenditure targets,
sectoral allocations, and all allocation for all social and development
programs is usually based on the nominal growth numbers. The benign inflation
post GFC has resulted in a faster decline in nominal GDP growth as compared to
the real GDP growth. However, now the nominal growth has reached the level
where a decline would directly result in lower wages, lower rental and lower
returns on savings.
A sustained downward trend in nominal growth may result in some
dramatic adjustments in socio-economic structure. The effective rate of
taxation may have to be raised considerably to meet the social development
targets. The household savings that have been a traditional source of safe and
steady funding for both corporate and government may decline widening the gap
for fiscal and corporate funding. The socio-economic inequalities may rise
materially as the poor and middle classes become sustenance households (earning
just to meet the expenses, just like developed economies) without any material
social security benefit.
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As RBI recently highlighted in its monetary policy statement the inflation trajectory is most likely to remain benign, except for few cyclical spikes in food inflation. This essentially means, the policy makers, administrators, businesses, workers, consumers, savers and farmers all might need to reset their plans, policies, aspirations and expectations.
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