There "really is no such thing as 'the future', singular" says Niall Ferguson in his book 'The Ascent of Money’. That neither detains nor deter theorists. The discourse on India’s economy is sprouting green shoots of theories on the future of the economy amidst present realities. To paraphrase Ferguson, the hypotheses of multiple, unforeseeable futures, are armed with the capacity to surprise.
This Tuesday, the Finance Minister told the audience at a virtual conference that as per high frequency indicators, ‘green shoots’ of recovery are visible and that the government was watching and acting. On Thursday, the economic affairs secretary speaking at a FICCI conference cited better advance tax collections to aver that ‘contraction in the economy may not be as much as some are expecting’ and claimed the country could see a ‘V-shaped recovery’ in 2021.
Interpretations of data can only be validated by historians. After all, the observed is but one splice of what is observable. For those here and now, what is significant is that the observations arrive without the expected feel good factor. The optimistic prognosis has raised eyebrows — particularly in the context of the surge in number of COVID-19 cases and repeated lockdowns across states. More critically, interpretation of data militates against interpretations of others.
Reports released over the past few weeks, including those by banks and agencies, present a contrasting picture. On July 16, rating agency ICRA revised its forecast and estimated that the economy will contract by as much as 9.5 per cent, deeper than its earlier assessment of 5 per cent. The literature of the shape of recovery has drawn from vivid imagination and is a choice from a soup of alphabets V, W, U, L and even shapes of logos of Nike and Li Ning. ICRA estimates “The timeline for a firmer recovery out of the contractionary phase is now being pushed ahead to at least Q4 FY2021 from Q3 FY2021.”
An important data point to measure economic activity is credit — bank credit to commercial sector between April and July is negative at -0.8 per cent compared to same period in 2019-20 and 6.2 per cent year-on-year compared to 11.5 per cent in 2019. On the flip side, banks continue to park their monies in government securities.
Another data point is the fate of loans. This week in its report on Financial Stability, the RBI states under baseline scenario, gross NPAs could rise from 8.5 per cent to 12.5 per cent, the highest in 20 years. Indeed, barring four every parameter on the systemic risk survey is pointing north. There is no mistaking the economy is overwhelmed by the consequences of the pandemic. SBI, in its EcoWrap in the first week of July, observed “we feel no sector is untouched by impact of Covid19” and pointed out that “The pandemic has resulted in unprecedented rating downgrades across sectors. We had 182 upgrades and 2996 downgrades just in the first quarter of FY21.”
There are high-frequency indicators and then there are high-frequency indicators. As per SIAM data, auto sales dropped 51 per cent in June 2020 and TRAI data reveals 8.2 million mobile subscribers exited networks in April. While PMI or the index of purchasing managers has improved following the lifting of lockdown, fact is both manufacturing and services are operating at sub-par levels. Factory activity contracted for a third straight month and services sector activity contracted fourth successive month in June.
What is problematic is not the optimistic forecast but the sanguine approach, the misplaced notion that recovery will come without a meaningful stimulus package. Yes, the government has promised action and it did initiate measures but much of it was focussed on the supply side with RBI doing the heavy lifting – and here again it is yet to craft a plan for the post loan moratorium phase. The fiscal stimulus required to address the decimation of demand is as yet missing.
World over governments are rewriting the general theory of employment, interest and money first conceptualised by John Maynard Keynes. The US and other large economies have written cheques of over $ 4 trillion dollars. Earlier this week, 27 countries in the European Union came together to put together a package of $858-plus billion of which over $400 billion would be issued as grants to member states. Elected representatives in the US are working on a new trillion dollar plan.
Governments choose the policy to suit the context — Keynesianism during recession, Friedman-style monetarism or Austrian-ism to mend ways or plain old bailout as seen in 2008. India’s approach in the face of a severe contraction is curious — the optics of Keynesianism with monetarist characteristics.
The inescapable reality is that the longer an economy punches below potential, the deeper it will drag down its potential growth rate. In an era when human interface is being rapidly retrenched, the unemployed can quickly become unemployable.
Like companies, countries operating below capacity are doomed to dire straits where deficits and debt will overwhelm the economy. Growth is critical — more so for India with 90 crore of its 135 crore in the 15-64 age cohort. The question, therefore, is not whether India can afford to spend but can India afford not to spend.
(Shankkar Aiyar is author of The Gated Republic - India's Public Policy Failures and Private Solutions, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India. He can be contacted at shankkar.aiyar@gmail.com)