Not all gloom on the economy front

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 Not all gloom on the economy front

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• Considerations while interpreting the -23.9% fall in GDP: 

1. All activity was shut during two of the three months of the quarter, so the fall in Q1 2021 GDP is only logical.
2. Lockdowns were essential in India given its population density, poverty and democratic freedom. If India had done nothing, it would have recorded over 2 lakh deaths and a far higher infection rate. The lockdowns gave India time to ready its medical infrastructure which leading to relatively low number of cases per million. 
3. Central Statistics Office’s (CSO) estimates consider parameters from transport and core sectors, which were affected severely. Home and Internet services and the informal sector were not accurately measured. 
4. Fall in demand was less than fall in supply in Q1, so demand-side stimulus would not have helped. 
5. Gross fixed capital formation fell 47% and construction 50%. Public work such as road building also stopped. But government expenditure did increase, although public administration, defence and other services stalled. 

• Signs of recovery: 

1. Gradual reopening began in June and economic activity increased. With state-level lockdowns that restricted inter-state movement, it plateaued in July. Sufficient testing and micro-containment strategies have been found to be effective, and inter-state movement will not be restricted from September onwards.
2. Purchasing Managers’ Index (PMI) increased by 25% over April PMI indicating signs of recovery. 
3. August 2020 consumer electronics sales increased by 40% over August 2019 sales, indicating demand recovery. The well-off have saved during the lockdown and will add to demand as economy reopens. Gold loans and salary-backed personal loans have increased. 

• Finance-led strategy: Key driver for government’s finance-led strategy is containing the rise in fiscal deficit and borrowing cost. Government plans to moderate future rise in debt such that growth recovers. 
• Finance-led strategy is working:

1. Financial sector is not as weak as perceived to be and was ready for the government’s strategy. Bankruptcy process initiated had led to recoveries. Governance and regulation had also improved.
2. Tight liquidity and risk-aversion due to corporate failures were the causes of weakness. RBI has injected liquidity and risk-aversion has reduced. Corporate and govt. bond markets have revived.
3. Credit markets have also revived. Severe fall in credit weakened consumer spending and GDP growth in 2019. This will reverse with increase in liquidity and credit. 

• Fear of rise in NPAs:

1. NPAs may not increase steeply. Only 10%-60% of borrowers have utilized the moratorium, borrowers may not struggle to repay debt. Loans to firms in affected sectors will be restructured if they are viable in the long-term. Reformed banks are now making risk-based loans.
2. If NPAs rise, banks are prepared. There is sufficient equity. Public sector banks (PSBs) can be refinanced, if necessary. Recapitalization, delayed before IBC came into effect, can now be executed.

• Demand stimulus: 

1. With lockdown being lifted, supply-chains are getting restored. Kharif-sowing is over and migrants are returning to cities. With supply-side recovery underway, demand-side recovery should now be set in motion. 
2. An urban jobs program that transfers money from a centrally sponsored scheme to municipalities would help municipalities meet Covid-19 related expenditure, protect migrants, unemployed and small industries, and aid demand.

• Summary: The sharp fall in Q1 GDP was only logical since all activity was shut during Q1. Signs of recovery are beginning to emerge. Government’s finance-led strategy seems to be working. With supply-side recovery, government should now look at boosting demand. Government consumption alone cannot revive growth. It should revive private consumption and investment. 

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