Economic bites

Now that we all live in a real time world, courtesy the near ubiquitous digitization of our lives, government processes which share economic information with a lag, are irksome at best and superfluous at worst. Consider that the scheduled release today, of the official version of GDP destruction in Q1 of fiscal 2021 (April to June2020) already smells stale.

What the economic data tells us

Private GDP estimates, using high frequency data as proxies for production and consumption, have suggest for some time that GDP decreased by up to 25% possible even 30% in Q1. This links well with the government accounts which show that in Q1 tax revenue declined by 32.5% versus the year before . Tax collection fared better in July with a decline of 30% versus the same month last year – a sign of hope. The official estimates for GDP released today confirm a decline in Q1of 23.9% over last year.

Sensitive treasury management

On expenditure the government continues its policy of graduated fiscal support to the most affected sectors of the economy – rural areas to which between 10 to 30 million (estimates vary widely) migrant workers fled in the face of the pandemic lock down in urban areas. Expenditure is significantly higher than last year measured by percentage point (pp) increase relative to the budgeted amounts – Fertiliser (3pp), Food processing (9pp), Pharma (8pp), health and rural development (49pp).

Conversely allocations to economic ministries, defence, home affairs and non-core sectors has been slashed to create room for the COVID centric priorities. Nevertheless, the annual budget for the fiscal deficit was exceeded by July end by 3% – a harbinger of the leveraged spending necessary through this year and the next.

Public Debt woes

The union government is already facing upward pricing pressure from the market for selling its bonds. Borrowers are up to their gills in low return government paper. What they want is higher yielding private debt – but only with acceptable risk ratings and fundamentals which is scarce. Significant enlargement of the government’s borrowing program from Rs 8 to 12 trillion can only make it worse.

We are caught in a downward spiral of Covid management regulations which constrain a mass return to work. Workers, sitting at home, are eating into their savings to survive. All but the minimally leveraged businesses face the challenge of declining resilience to low demand.

Covid updates

The good news is that despite Covid testing having been scaled up, the daily increase in confirmed cases over monthly intervals has slowed from 180% as on July 30 (versus June 30) to just 51% on August 30 (versus July 30). The number of confirmed cases – a metric invariably used by media and alarmists – continues to increase. But the rate of increase is slowing. 

When are new infections likely to be come zero or near zero? If the reducing trend rate of new confirmed cases as seen over June 30 to August 30 continues (a credible assumption) we should have a zero rate by January 2021. With expectation of a vaccine also becoming available, soon thereafter, the end of the economic damage caused by Covid can be envisaged in fiscal 2022.

So, there is light at the end of the Covid tunnel, albeit only three quarters away. Why is it important to define the possible end of the Covid constraints? Government and households need to have an end point in sight for resorting to extraordinary measures to balance budgets or husband their resources better. 

The unfinished tasks

Government should start thinking about focusing expenditure on creating demand for services and goods and possibly deferring clunky purchase of imported equipment. Quickly restarting construction activity can help kick start jobs and livelihoods, particularly in urban areas. 

Walk the talk with agri exports

A close look is needed at the export business. By all accounts, the Rain Gods and fewer Covid regulations in the rural areas have ensured that agriculture will grow at more than 3.5% this fiscal, which is a good performance even in otherwise normal years. With domestic demand sluggish through the year, only booming exports can salvage a recovery and transfer income to the working class. This could be the year India pumps up exports of agricultural commodities in a focused manner. We must walk the talk on agricultural liberalization.

Use leverage selectively

The relaxed provisions for debt in state government budgets through enhancement of their borrowing limits from 3 to 5 % of their state domestic product, is very welcome. But a commonly agreed framework on how the money will be spent needs to be forged – especially if the creation of jobs and livelihoods and enhanced social protection measures are to be targeted. These are soft areas, as compared to hard infrastructure and a basic design for efficient outlays is essential. 

Choose climate resilient high-social-return projects

Inserting a climate resilient filter into project assessment is essential to ensure that accelerated investments are not just washed away during the next monsoon or climatic disturbance. The strict avoidance of gold plating in technology choice, amount of land required for a project and resilient business models are not yet par-for-the-course in project selection and financing. When money is scarce it pays to spend it properly.

Nuanced procurement process

The Union government should take the lead by changing how projects are bid out. Presently, the bid is first assessed on whether it meets the specified technical standards and specifications. If so, it is short listed and the lowest bid in the short list wins, though some weightage is also given to the quality of the technical proposal. But the bid cost is of paramount importance. 

Cases of underbidding are legion, causing delays and dodgy post-bid award settlements. Initiating a rationalized framework for the Covid package projects can be a long-term game changer. State government should be encouraged to experiment with alternative auction methodology and choose what fits them best, without incurring the wrath of the Three Horsemen (CVC, CAG and CBI).

The fiscal grind

The fiscal constraint is not going away this year. Even FY 2022 will need greater public fiscal outlays to pull business and jobs out of the hole they are in this year. Additional borrowing over these two years can push our debt/GDP ratio to 90%. This by itself is not a worry. The efficiency with which the borrowed money is spent is the big worry. 

If the borrowed buck continues to buy a bang much lower than the highest efficiency norm (Incremental Capital Output Ratio of 3 – every Rs 100 invested contributing on average Rs 33 of incremental GDP) the public debt is bound to become unsustainable because public profligacy is a tough habit to shake-off.  

A version of this opinion piece is available at TOI Blogs July 31, 2020

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