A steep fall of 23.9 per cent in India’s real GDP in the first quarter tells us that a contraction of over 5 per cent of GDP in 2020-21 is definitely on the cards. The disaggregated numbers tell a story of the effects of a prolonged lockdown, even as the nation grapples with ever-rising Covid cases. While agriculture was up by a modest 3.4 per cent (quite in line with the trend), mining, manufacturing, construction and trade, transport and communication contracted by 23.3 per cent, 39.3 per cent, 50.3 per cent and 47 per cent, respectively. On the expenditure side of the GDP equation, it is clear that private consumption is no longer in a position to hold up the economy, having fallen 26.7 per cent in Q1. What is, in fact, alarming is the halving of gross fixed capital formation (or investment) to ₹6 lakh crore; this is even as the decline in investment appetite precedes Covid, as GFCF fell 6.5 per cent in Q1 of 2019-20 as well. The fall of 5.3 per cent in financial, real estate and professional services, another driver of growth, is attributable to the collapse of the brick and mortar sectors and the demand that ensues from them. Real estate and professional services have been impacted by the collapse of consumer demand. What’s happening isn’t hard to decipher: the supply shock has dragged demand down with it, through loss of jobs, and that is further pulling down the productive forces in a negative spiral. Those who do have the wherewithal to spend are in ‘precautionary savings’ mode. The onus clearly lies with the government to boost demand in order to break out of this spiral. Even as rate cuts since February and liquidity injections with a view to boosting credit to NBFCs are showing some results, these are inadequate in relation to the magnitude of the crisis at hand.
The task before the RBI is to keep yields in check even as the government expands its borrowing programme. Notably, the Chairman of the 15th Finance Commission as also the panel to review the FRBM (Fiscal Responsibility and Budget Management) Act, NK Singh, has said that the law should perhaps be amended to allow for a higher deficit than is permissible under its provisions —which possibly implies an escape clause of more than 0.5 per cent of the GDP. While India cannot go the way of the advanced economies in opening its purse strings without creating external account imbalances — the rupee cannot be compared with the OECD currencies — a calibrated expansion should not be off the table. The FRBM limits should be a subject of discussion when Parliament reconvenes.
On the data points, there is a grey area. While public administration on the income side shows a contraction of 10.3 per cent in Q1, the government’s final consumption expenditure shows a 16.4 per cent increase. It’s up to the government to do the heavylifting through infrastructure spending, as advocated by the RBI, crowding in private investment in the process.