Vijay Kumar Gaba

The Reserve Bank of India, in its latest policy review, refrained from making any projection for the economic growth for the current fiscal year. It however admitted that the economy may see some contraction in the current fiscal year FY21. Post announcement of economic performance data for 1QFY21 a number of agencies and brokerage firms have reduced the full year FY21e GDP contraction number to ranging from -5% to -11%. Similarly, the fiscal deficit number for FY21 now range from 6.5% to 8.5%.

Recently, the former governor of RBI, Dr. C. Rangrajan surprised the markets by stating that FY21 GDP may actually post a small growth instead of contraction. This was a clear departure from his views expressed a couple of months back.

A paper titled ‘India’s Growth Prospects and Policy Options: Emerging from the Pandemic’s Shadow’, jointly written by Rangarajan and India EY India chief policy advisor D K Srivastava noted that notwithstanding the forecasts of GDP contraction made by many national and international agencies, there are reasons to believe that the outcome may be better than these strong contractionary prospects. “We may note that some key sectors like agriculture and related sectors, public administration, defence services and other services may perform normally or better than normal given the demand for health services,” the paper said.

The view is based on the estimates that about 50% of the economy, comprising of agriculture and public administration, defence and other services has been fully operational even in the first quarter when total lockdown was in force. The paper emphasizes that measures like lower corporate tax rate, and incentives for local production may facilitate the relocation of various production platforms to India adding impetus to the normal economic activity.

This view however is not supported by many. Most analysts and economists continue to beleive that recurring local interupttions have not allowed the supply chains to start functioning normally. The mobility restrictions are still inhibiting. As per Nomura India Business Resumption index (NIBRI), the economic activity in India has reached ~77% of February 2020 level. The growth in 2QFy21 will therefore likley be still negative.

At the same time, another former RBI governor, Dr Raghuram Rajan, termed the situation of India economy as "alarming". In a post he noted that the conditions in India are worsening and the government has gfone into a shell after an initial burst. He said, he current crisis requires a more thoughtful and active government, he said, adding "unfortunately, after an initial burst of activity, it seems to have retreated into a shell." Dr Rajan exhorted the Indian bureaucracy, by saying " be frightened out of their complacency and into meaningful activity. If there is a silver lining in the awful GDP numbers, hopefully it is that." Dr Rajan further noted that "Without relief, houshold skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself".

Assuming a moderate 5% yoy contraction in 2QFY21, it would take more than ~15% yoy growth in 2HFY21 to record a marginal rise in FY21 GDP. There is nothing on the ground to suggest that it is achievable. It is pertinent to note that in past 12 year, we have not recorded double digit yoy growth in any of the quarter.

Under these circumstances, I find the the estimates of the rating agency CARE more credible. The agencyy said in a recent report as follows-

"GDP growth although expected to improve in the remaining 3 quarters of 2020-21 with the graded unlocking and reopening of the economy would nevertheless be pressured given that there is no respite from the spread of the pandemic in the country well into the second quarter of the fiscal.

Consumption demand and investments which is necessary to propel the economy would continue to be tepid and is unlikely to seen a noteworthy improvement during the course of the year. Government spending would have to do the heavy lifting.

Although the higher growth in the agriculture sector and consequently rural demand would support the domestic economy it would however not be sufficient to compensate for the decline in urban demand and growth. We project the country’s GDP to contract by around 6.4-6.5% in FY21."

Many readers have asked why would Dr. C. Rangrajan, who has held prominent positions under various governments, such as Chairman of PM Economic Advisory Council (2009-2014); Member of Rajya Sabha (2008-09), Chairman of 12th FInance Commission (2003-04); Governor of Andhra Pradesh (1997-2003)etc., would make such contrarian and to some extent sensational forecast?  Well, I have views on this, but would refrain myself from sharing my views on this.

The economic growth in first quarter of current fiscal year (FY21) contracted ~24% as compared to 1QFY20. The data released on Monday evening was not shocking as this quarter was impacted by the total lockdown of economy to mitigate the impact of COVID-19 pandemic. However, it was surprising to the extent that it surpassed all the worst case estimates and is the worst economic performance amongst all major global economies.

The sharp economic contraction has come after a sustained economic slowdown over past four years. The investment activity and new employment creation has virtually collapsed in post demonetization (November 2016) period. The household savings, which traditionally cushioned the fiscal profligacy of governments, have declined sharply and rate of incremental rise in per capita income has also declined. The wealth and income inequalities have seen sharp rise causing widespread civic disquiet in the country. The stress on financial sector is not easing materially despite a number of measures taken to this end.

To me the data is worrisome on many counts. For example—

(b)   The government seems to be in denial mode still. The economic manager of the government like Chief Economic Advisor of PM, Principal Economic Advisor of FM, Finance Minister, Commerce Minister et al, are still talking about a "V" shaped recovery, refusing to accept the broken supply chains and diminishing demand.

The suggestions like make toys and export Kohlapuri chappals sound totally incongruent. Indian manufacturers have not invented any toys or video games since Indus Valley civilization. Our traditional toys made of earth and wood are all inspired by the ancient toys; while the modern (even soft toys) toys are all poor copies of the "imported" toys. Building capacities that can produce modern toys at rates competitive to Chinese imports would need massive investment. Is it desirable to do so, when the trend is moving towards digital games?

The Kohlapuri chappal trade is facing multiple problems due to issues with bovine leather availability. The minister wants $1bn worth of annual exports of Kohlapuri chappals; which comes to ~2lac pair of chappals every day (assuming average price of $15/per pair). A tough ask by any standard! (see here)

The vision and experience needed to accelerate growth while facing the challenges of sustainability, survival, equity, capital scarcity, fiscal discipline, etc is certainly lacking. And that is worrisome.

(c)    The growth has been on the decline for past 4years now. Notwithstanding the claims made by the government and political parties, we have not seen much progress on socio-economic equity aspect. However, no one has accepted accountability for the inadequate and misdirected policy response. This lack of accountability is in a democracy is also worrisome.

(d)   The federal structure of the country has got severely damaged in past few years due to rise in mistrust between the ruling and opposition parties. Under these circumstances, forming consensus on any issue of national importance appears difficult. This is worrisome.

(e)    The rising incidence of unemployment and unemployability amongst youth is leading to rise in instances of crimes like theft, looting, kidnapping for ransom, mugging and even rapes etc. This restricts the mobility of people, especially women, having serious economic implications. This is worrisome.

The 1QFY21 results announced so far have been mostly better than average estimate of various analysts. About two third of the companies in Nifty 50 universe have declared their results so far. Out of these about 10% companies have missed the analysts on EBIDTA front; while 60% have surpassed the estimated with decent margins. This has obviously comforted the investors. Nifty sales has declined 28% (yoy) while EBIDTA decline is marginal at 1%. This highlights that most companies have managed their cost very well. The empirical evidence suggests that cost savings are mostly sticky with most of the Indian companies. This certainly augurs well for the future profitability of companies.

The good news however ends here. On macroeconomic side, the incremental data is indicating that the economic recovery might be stalling after small recovery in May and June. Many economists and strategists have underlined this phenomenon in their recent reports. For example, note the following:

"Phase 2 of unlocking India commenced from July 1, which offered more relaxations and left it to State governments to decide the extent of unlocking. Our data shows July did not witness much incremental improvement and the pace of recovery has hit a plateau. Our Activity Index shows that in July the economy operated at 79.6% of capacity, which existed in February (pre-COVID). One reason apart from the Monsoon and intermittent lockdowns that could be moderating the pace of normalization could be the resurgence of cases in rural India. (emphasis supplied)" - Elara Capital

"Our in-house Economic Activity Index (EAI) for India’s real GVA (called EAI-GVA) contracted 7.0% YoY in Jun’20 – its fourth successive decline – which implies that economic activity shrank 18.7% YoY in 1QFY21. Industrial activities contracted sharply by a fifth (compared to 33% fall in May’20), while the services sector shrank only 3.6% YoY (supported by massive fiscal spending) in Jun’20. Farm activities grew 10.4% YoY – the highest pace in nine years.  EAI-GDP index (our in-house measure of official GDP) also contracted 4.8% YoY in Jun'20, following 19.7% decline an month ago and implying a decline of 18.4% YoY in 1QFY21. Very strong fiscal spending growth of 49% YoY supported EAI-GDP, without which the decline was 7.5% in Jun’20. Private consumption spending contracted 9% YoY and investments declined 30% YoY in Jun’20. Excluding government spending, EAI-GDP contracted 20% YoY in 1QFY21.  Overall, our estimates suggest that real GDP may have contracted 18-20% YoY in 1QFY21, in line with our forecasts. We expect another decline of 2-3% YoY in 2QFY21, before real GDP posts growth in 3QFY21." - Motilal Oswal Securities