Next week, the government will release GDP data that one would rather not see. We've been forewarned about the devastating 16-25 per cent de-growth of the quarter gone by, so that's not the real worry. Trouble is, India's potential GDP, unhelpfully, is being reduced to a rump with economists pegging it to have slowed to 6 per cent already.
Potential GDP is the level of output an economy can crank out under low and stable inflation and is different from the annual growth projection. Until recently, India's medium-term potential growth was 7-8 per cent, but according to Tanvee Gupta Jain, Economist, UBS Securities, it's now expected to trend lower at 5.75-6.25 per cent, but still compares favourably with other emerging markets such as Brazil (2.0-2.5 per cent), Russia (1.5-2 per cent), Indonesia (5.2-5.6 per cent), and China (5.5-6 per cent).
But none can blame all our economic misfortunes on the pandemic-led disruption as our growth woes were intensified partly due to inherent problems such as the financial sector mess and stress among households amid reduced income levels. Together, they affected consumption and fixed investment constituting 60 and 27 per cent of GDP respectively.
For instance, as Gupta explains, households' balance sheet deteriorated as they funded consumption taking higher leverage, which shot up an estimated 23 per cent of personal disposable income in FY20 from 16 per cent in FY12 and dipping into their savings that down to 17 per cent of GDP in FY20 from 24 per cent of GDP in FY12. The bottomline is, the spillover effect will likely stretch a few years at least and that's bad news for potential growth prospects.
That said, 7 per cent growth remains on the horizon provided investments and productivity gain ground, if India integrates into the global supply chain and if the government changes its focus from repair to growth by undertaking more growth-supportive reforms such as the recent corporate tax rate cuts. That's because, estimates of potential growth are influenced by government policy and reforms. So, Gupta believes that given the fiscal constraints and sluggish investment cycle,
boosting growth beyond six per cent without improving potential growth over the next 3-5 years will
entail widening of macro stability risks (inflation, current account deficit, and fiscal deficit) and is unsustainable. Meanwhile, though economists are certain about Q1 growth contraction, they don't tell us if April-June was the kitchen sink quarter, where all bad news gets out once and for all, or if we'll have more such quarters during the fiscal.
Unlike April and May that saw total lockdown, the economy has been gradually opening up, which means, growth in subsequent quarters is unlikely to be as disappointing as Q1. Still, the first quarter loss in national output is so large that even if we do better later, the full fiscal will likely see the economy contracting by at least six per cent.