Ramp up infrastructure to revive economy
Senior Financial Journalist
The crash was expected, but the extent was a surprise. The 24 per cent contraction of GDP in the first quarter of the current fiscal — April to June 2020 — was startling even to seasoned observers of the economic scene. Given the severity of the lockdown, however, even a layman could see the complete collapse of economic activity throughout the country. Unlike China, which had carried out only a regional lockdown, India’s was a countrywide one, leading to severe ramifications now showing on the economy. On the plus side, agriculture has emerged as a silver lining showing a positive growth of 3.4 per cent during the quarter. Not only that, it is evident that the upward trend will continue in the second quarter in view of plentiful monsoon rain, increase in sowing acreage and rise in sales of farm machinery.
A closer look at the data shows predictable and previously discernible trends. Construction collapsed by a massive 50 per cent, manufacturing by over 39 per cent and the trade, transport and hotel sectors by 47 per cent. The lockdown led to a virtual closure of all construction activities, whether in real estate or in development projects. Manufacturing was also in lockdown and even those who tried to resume production in May found workers had gone home to rural areas. Trade, transport and hotels were at a complete standstill during April, though there was a slow revival of road and rail movement from May onwards.
The contraction during the April-June quarter has to be viewed in the context of the earlier dismal performance of the economy which had risen by only 3.1 per cent in the January-March quarter, the lowest in 17 years. Overall growth had dipped from 6.1 per cent in 2018-19 to 4.2 per cent in 2019-20, the lowest in 11 years. So, it may be the first economic contraction ever since the country began publishing quarterly data in 1996, but it is certainly in line with earlier trends and clearly reflective of the devastating impact of the lockdown.
It has to be said that some agencies did make fairly accurate projections about contraction in the April-June quarter. For instance, investment bank Barclays as well as credit rating agency ICRA predicted a 25.5 per cent decline in GDP over this period, though most others, including HDFC Bank, were expecting a lower 20 to 21 per cent. If their projections are correct for the next quarter — July to September — the situation will continue to be strained but not as cataclysmic as earlier. Barclays expects an 8 per cent contraction, while ICRA’s projection is 12.4 per cent.
The way ahead is clearly perilous, but there is some good news despite the overarching gloom spread by this data. The big point is that the collapse recorded in the April-June quarter is unlikely to be repeated since it was directly linked to the crippling lockdown curbs. These have been removed, though some states are carrying out short-term lockdowns that could impede moves towards economic recovery. It also has to be conceded that several economic indicators are showing improvements over the past few months. Core sector output, for instance, fell by 38 per cent in April but has now recorded a decline of 8 per cent in July. Other parameters have also recorded an increase over this period, including rail freight traffic and e-way bills, which reflect growth in road transport. At the same time, the data also shows that the recovery recorded in June is plateauing in July and August. This is largely because the pent-up demand had petered out by this time, so upticks in performance are likely to be slower.
The other positive element in the just-released data is the rise in government expenditure by 16.4 per cent, the highest ever over the past five quarters. This has been one of the factors for the contraction having been contained, given the 26.7 per cent decline in private consumption expenditure. In the face of declining government revenues during the year, it is clear that the fiscal deficit will now widen from the projected 3.5 per cent to a much higher level. But this is not the time for worrying about the deficit; rather, it’s the time to focus on growth in consumption.
Undoubtedly, the government needs to chalk out policies that will boost demand. It needs to loosen its purse strings even further than it has done till now. The initial stimulus package was disappointing as it largely comprised existing budgetary schemes. The next one needs to give a much sharper boost to economic growth. The first step could be, as has been suggested earlier in these columns, to put money into the hands of those who need it most by transferring money directly to their accounts. Some developed economies like the US and the UK are already implementing similar programmes. In India, it need not be universal but can be limited to those who have already been identified as being below the poverty line. The advantage of putting in place an efficient direct benefit transfer system is that the entire amount reaches the beneficiaries without any dilution.
The second area of focus needs to be medium and small enterprises. The credit package unveiled earlier has met some of their needs, but several lacunae remain in the implementation. Many small companies find they are ineligible to receive the benefits of these schemes due to various reasons. These hurdles need to be removed without any delay.
And finally, the government needs to carry out an intensive infrastructure spending programme. It was Atal Bihari Vajpayee, an unlikely reformer, who launched the golden quadrilateral road construction programme two decades ago that revitalised the economy. A similar innovative zeal and vision need to be shown now to ramp up infrastructure and give a shot in the arm to economic growth. The previous style of incremental reforms is no longer good enough. Bold measures are needed and this government must take them rapidly to revive the economy.
