GDP numbers: If govt doesn’t spend a lot more, expect a big collapse

Investment has been sluggish for several years now, and GFCF had contracted in the last three-quarters of FY20.

Given how the near-24% contraction in GDP in the June quarter was much worse than consensus estimates, the economy is clearly in worse shape than we believe it is. These numbers have been crunched in the absence of adequate data, and the revised data could be even more disappointing. In fact, given the performance of the informal sector is extrapolated from the formal sector data—and that the pandemic would certainly have hurt the informal sector more badly than it has the organised sector—there is a fairly good chance the growth numbers would turn out to be weaker.

Indeed, one area where economists seem to have been a little too optimistic is agriculture, which clocked in a growth of only 3.4% y-o-y, nearly 150 basis points below consensus estimates. For all the talk of the rural sector supporting the economy, that does not seem to have materialised at all; economists have pointed out that rural India depends heavily on the construction and real estate sectors doing well to create jobs, but both are in dire straits.

Expectedly, private consumption collapsed in Q1, contracting nearly 27%; but we knew consumers were being cautious because PFCE grew at an anaemic 2.7% y-o-y in Q4FY20, the slowest in 21 quarters, even though business was shut for just 15 days.

Investment has been sluggish for several years now, and GFCF had contracted in the last three-quarters of FY20; so, the negative 47% y-o-y in Q1FY21 does not come as a shock. In fact, unless the government now spends serious amounts on capex, the GFCF could trend below 22.3% of GDP seen in Q1, which is the lowest level reported in at least eight years. As of now, there are few signs the government is stepping up. The Centre’s Budget spending in April-July was up just 11.3% on the year, compared with the targeted rate of 13.2%. For July, the increase in spending was a mere 6% y-o-y, against 46% achieved in June; also, the budget capex in July actually fell sharp 47% y-o-y. Since the private sector would be very hesitant to risk more capital, the government must be bold and spend significantly. It could easily tap household savings—at reasonable interest rates, especially since banks are not putting deposits to work.

We need to appreciate that corporate India is strapped for cash; profits for a sample of about 1,400 companies crashed 35% y-o-y in Q1FY21. The government also needs to support MSMEs, which have been debilitated by disruption, beyond the guaranteed credit lines, otherwise many units may yet succumb. Support for the Covid-hit sectors—hospitality, aviation, tourism—either with credit lines or other measures is urgently needed; indeed, much more support for the industry is called for because there is a high chance of many businesses going belly up.
Once the government spends meaningful amounts—in capex—it would boost demand, giving the private sector the confidence to invest. There is also an immediate need for some kind of a consumption stimulus, even if for a limited period during the festive season. A cut in personal income taxes—at the lower-income levels—would help as would cuts in GST on items such as two-wheelers. Without this, consumption would stay sluggish, leaving India to report a double-digit contraction in GDP in FY21.