Things Can Only Get Better

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 Things Can Only Get Better

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• Growth in all sectors has declined: Not only is -23% decline in growth the largest quarterly decline ever recorded but growth has declined across the board. Trade declined by -47%, manufacturing by -39.3%, and public administration by -10.3%. Only growth in agriculture was positive (3.4%).
• Not a question of if but how much: The decline was expected but the question was how much the decline would be, as high as Britain’s (-20.4%) or more modest like Indonesia’s (5.32%). Turns out India’s decline is even worse than Britain’s. 
• Decline in public administration is worrying: Decline across sectors in worrying but what is surprising is that rather than increase in spending to salvage the economy, public administration has also contracted. Also, contraction in economic activity is expected to continue in Q2. 
• All economies have contracted: Britain has slipped into recession; Japan has recorded a decline in GDP for the third consecutive quarter. Thailand, Malaysia, Philippines, Singapore, all have shrunk. 
• Solace:

1. This is the lowest the economy can drop. As India unlocks further, economic activity although sluggish, will increase. 
2. Consolidated fiscal deficit (centre and states) is high, but India has been conservative with its fiscal policy as compared to other emerging markets.
3. Debt-GDP ratio is high but most of the debt is domestic, not external and hence not much affected by foreign investment fluctuations. 
4. US Federal Reserve seems to be focusing on jobs and growth, not on inflation, an indicator that its easy money policy will continue. India’s consumer price inflation (CPI) is high at 6.93% but it is primarily food inflation caused by lockdown-induced supply-chain disruption. Like the Fed, RBI can afford to not focus on inflation solely. It is already focusing on open market operations. 

• Government and public administration: Economy can’t be revived by RBI action alone. Public administration is the only sector other than agriculture that can provide some boost to the economy. By increasing infrastructure spending government can stimulate the construction sector and create employment, assets and income. 
• Summary: Sharp decline in GDP was expected but the magnitude of the decline (-23%) has been startling. What’s more, all sectors have recorded negative growth, except agriculture. The silver lining is that this is the slowest economic activity can get. As India unlocks, activity will increase. India’s fiscal deficit and debt-GDP ratio are high but most of the debt is domestic not external borrowing and hence not vulnerable to foreign investment fluctuations. There are also signs that US fed’s monetary easing will continue. RBI can focus on issues other than inflation. But government should play its role and increase infrastructure spending to create jobs and income.

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