Looking up, from the bottom, our woes seem never ending however calmly reassuring be the top-down messaging. Ending this dichotomy in perception can only help.
First, part the veils which shroud facts. We are in a medium-term downturn at best and a short recession at worst.
Some recent eco history – Slowing economic growth not new
The economy slowed after Q4 2017-18 when growth in Gross Value Added (2011-12 prices) clocked a high 7.9%. Thereafter, real growth slowed over the next eight quarters consistently down to 3% in Q4 2019-20 MOSPI Press Note May 29 2020 . GDP growth (real) last year was just 4.2% a full 2.6 percentage points less than the 6.8% growth the previous year.
In current terms, which is more relevant for government revenue, FY 2019-20 clocked growth at just 7.2% versus 11% the previous year. No wonder then, tax revenue last year was just Rs 13.6 trillion or 18 % below the revised target of Rs 16.5 trillion set in July 2019.
Higher borrowing to make up the loss of Rs 3 trillion in tax revenue -linked to the lower GDP growth – plus the statistical disadvantage of a lower GDP as denominator, explains why the fiscal deficit (net borrowing as a proportion of GDP) last year came in at 4.2% and not 3.3% as targeted. Statistical subterfuge breeds lack of fiscal control.
Some economic navel gazing sorely needed
Second, we started FY 2020-21 with an wobbly economy which is not explicitly recognized by government. This “Nelson’s eye” strategy is a self-goal because “looking within” is the first step towards reversing a downturn.
Consider, it is tough to convince big business and the inheritance boosted rich to tighten belts if the government itself turns a blind eye to severe economic challenges. Witness the shockingly miserly response of big corporates to the COVID related human disaster of migrants fleeing red flagged, urban traps of disease.
Bombay Inc. flung some money into the PM Cares Fund. But it set up no parallel agency to alleviate the health and economic emergency by dispensing expertise, equipment or local organizational skills nor are there waves of deep compensation cuts across managerial and worker cadres to share the national pain.
It is no one’s case that job cuts- when necessary for business survival- should be banned. But not enough intent has been displayed to socialize the costs of the downturn internally, within firms. Do “Honchos” even care about protecting the dignity and income of employees?
BJP’s advance warning system of political red flags is broken
Third, the sensitivity of the Modi government to anything demolishing the staged branding of its omnipotence is mystifying to those, for whom the government has deep scorn – the thinking masses.
The Modi metric of political success – winning every political toss up – is unsuited for sustained dominance. Quite simply, like the LG Polymers unit in Vishakhapatnam, which cut corners on monitoring and safety devices, it fails to measure the political temperature in a manner which gives sufficient advance signals of political distress.
It is only once elections are lost that the BJP’s political barometer will signal the need for new tactics – possibly a mite too late as in the Vizag styrene handling unit.
The theorization of the “thinking crowd” around the 2014 BJP victory was that the prospect of “development as in Gujarat” paid political dividends. The more recent election leitmotif is that public belief and trust can be manufactured by optics and elections won by last mile and last minute gifts (PM Jan Dhan or PM Kisan Samman) or political management post-elections, as in Karnataka.
Savvy political economy move by FM Sitharaman
Fourth, COVID-19 sadly, reinforces the strong, top-down governance stereotype further, even amongst proponents of decentralization. What do local governments in distress look for except more support from the Union? The Left Liberal crowd has thrived on fingering the government for an inadequate fiscal stimulus.
Finance Minister Sitharaman’s response delegating power with responsibility, was swift and appropriate. On May 17 she unconditionally relaxed the fiscal deficit norm of 3% of GDP by 0.5% for states and allowed an additional 2.5% fiscal space in return for results in long stalled reforms in power tariff; implementing One Nation One Ration Card; improving their Ease of Doing Business ratings and boosting municipal and state tax revenues.
Q1 (April to June) 2020-21 is a blood bath of steeply negative growth of at least 30% over last year. Those looking for V shaped growth resurgence are spinning a pie in the sky. The best-case for FY 2020-21 is a negative GDP growth of 5%. The worst is a negative growth of 15%.
Combine a dramatically lower GDP with the accumulated off-budget liabilities by March 2020 via unpaid tax refunds, proxy borrowing by publicly owned enterprises and the extra support measures already announced and one can expect a fiscal deficit of 6.9 % of GDP by March 2021.
Fiscal stability a must have for the poor and the elderly
Printing money to take the “stimulus” higher can only end in disaster of the kind we are still recovering from, a decade after 2009. Even China, admittedly more leveraged than us, but also five times bigger in economic power, has limited borrowing this year to 8% of GDP -double of last year. But it has shied away from printing money. China monetary policy 2020.
For us, inflation remains a worry due to labor market rigidities; slow supply side responses; imported inflation via oil or import tariffs increased to meet tax revenue objectives and the need to keep the INR competitive. The accord of RBI-GOI April 1997 which ended automatic monetization of deficit must be respected for fiscal stability to prevail.
Inflation hurts the poor and pensioners the most, unlike the inflation-indexed bureaucracy or investors and business who welcome high inflation since it reduces the real value of their outstanding loans and the real cost of borrowings. Risking inflation whilst kick starting growth is not a poor man’s cup of chai. Finally, recognize that we remain a poor economy – no matter that the World Bank recently classified us as a lower, middle income economy. In the late Arun Jaitley’s terminology, that still slots us as “aspirational” people, not a global power, quite unlike the ones we prefer to sup with.
It is too hot to tangle with China
Our latest geopolitical pain-point is the muscular assertion by China of where their northern border with us should be by “digging into forward positions”. These are par for the course during the warm season after the long winters of those uninhabitable snowy peak. Nevertheless, a change of stance is needed to deal with a better equipped and funded adversary.
Defence Minister Rajnath Singh has done well to lower the rhetoric. It is not time yet for a face-off with China – a “weigh in” which can cost us resources we do not have.
Carrying a “Rooseveltian big stick” may be unnecessary. But per “Ganga-Jamuni thezeeb” it pays to speak softly whilst encouraging an aide to carry a stick should a whack becomes necessary.
Also available at TOI blogs May 31, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/keep-our-economic-ammo-dry/