It’s a recession, said Harry Truman, when your neighbour loses his job; it’s a depression when you lose your own. The India Story is stranded between recession and depression. The anecdotal and the experiential are reflected in empirical data.
This week, the government released the GST numbers. The fall in revenues, which illustrates shrinking of consumption and forecasts/projections of severe contraction — 4 per cent by Moody’s, 4.5 per cent by the IMF, 5 per cent by Standard and Poor and 6.5 per cent by ICRA.
What does a contraction of 4 per cent or 5 per cent translate for $ 2.86 trillion economy? India, as per Budget 2020, was expected to grow at a nominal rate of 10 per cent. A contraction of 5 per cent means the economy instead of growing from $ 2.86 trillion to $ 3.15 trillion would shrink. Rahul Bajoria at Barclays, in June, using a matrix of factors, estimated the loss at $ 306 billion or roughly Rs 23 lakh crore.
This does not factor the cost of opportunity lost and consequences ranging from loss of capacity, of employment, slide in investment, rise in bankruptcies and NPAs in the banking sector. Michael Patra, deputy governor at Reserve Bank of India, believes the destruction of economic activity “is much more deleterious in terms of loss of basic livelihood, economic security, health and confidence than the range of estimates/projections of GDP and other macroeconomic aggregates suggest”.
It is useful to refer to history on contraction and reversal of momentum. Indonesia’s GDP slid from over $ 200 billion to less than $ 100 billion during the Asian crisis and recovered to previous levels after five years. India, to paraphrase Lewis Carroll’s character the Red Queen, was already a slow sort of economy, running to maintain growth. To get out of the trough, it must plan and act now.
It is true that that the government in concert with the RBI has initiated steps — the moratorium, the credit line and flurry of policies to open up the economy to investment. What happens when the moratorium ends ? (https://bit.ly/36Loans) The focus has been on the supply side and what is missing is a plan to revive employment and demand — beyond the measures to sustain sustenance of those on the periphery of penury.
Revival of the economy calls for policies and funding which enable employment — of skilled, semi-skilled and unskilled labour, those who are on the edge of poverty — to propel incomes and demand.The potential for growth is located at the intersection of the agrarian and industrial economy hosting the bulk of the workforce. Revival calls for funding brick and mortar activity, investment in construction and infrastructure sectors to rebuild the economy.
The challenge presents an opportunity to align the moral obligations of the government with economic imperatives. In the design of the plan, India can address pending promises and deficits which impact its management of the pandemic and the quality of life. In 2018, the government promised addition of one lakh community health centres for rural health care. There is also the promise of piped water to every home — currently barely a fifth of households can access piped water.
Cities need to build sewage treatment plants — barely a third of the 60,000 million litres of sewage generated by cities is treated. Rural road connectivity is critical for the recently announced ‘one nation one market’ initiative for the agricultural sector. The list could include affordable housing, new smart cities and more.
Investment to enable this will deliver dividends to the flailing economy. Construction and real estate sectors, the second largest employers in the economy, have a multiplier effect on employment and economic growth as they accelerate demand generation across 200 plus segments of industry.
A large number of companies supplying materials are essentially small, micro and medium enterprises which employ the bulk of industrial labour. A CRISIL June 2020 study which describes MSMEs as the epicentre of the crisis reports rather ominously that “about 70 per cent of 40,000 companies have cash to cover employee cost for only two quarters.”
Revival calls for dismantling of misplaced notions to prevent the cascade of consequences, of bankruptcies, mass unemployment and further contraction in the economy. The RBI, which is working on a plan to restructure loans, must address sectoral distress as this represents systemic risk — and this was flagged earlier this week by HDFC chief Deepak Parekh.
The exposure of banks, NBFCs, funds and housing finance companies to construction and real estate is estimated at over `6 lakh crore — CRE Matrix, a real estate analytics firm, puts it at Rs 8.1 lakh crore. Preventing a sclerosis in capillary flows of credit is critical to any plan for revival of the economy.
Context and circumstance is critical for policy. In the developed economies — in the European Union and in the United States — central banks are extending and expanding credit. The objectives — to save jobs, protect capital, preserve capacities and promote growth — hold true for India too.
The visible hand of the government must invest and fund programmes to enable the invisible hands of enterprise to propel the virtuous cycle of growth.
SHANKKAR AIYAR
Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
shankkar.aiyar@gmail.com