We would be lucky to eke out a 2.5% real growth in Q4FY20, and a 3% real growth for all of FY21
Well before the entry of Covid-19 virus in India, the economy had already been ravaged badly by a tsunami of bad loans, demonetisation, and introduction of GST. Just about every economic indicator was flashing red lights, visible to all but those comfortably cocooned in the North Block. Hence, the potential impact of Covid-19 on India and its economy could be very similar to the life-threatening “co-morbidity” risk faced by individuals with a history of severe debility on account of other illnesses.
There is still some time, though very little, before the country is put on a ventilator. In this short window, many well-thought and bold actions must be taken. Many of these will require a “war-time” thinking rather than the business-as-usual attitude from politicians and the select band of top bureaucrats responsible for select key (economic) ministries.
Until early February 2020, India’s economy was expected to close FY20 at about $3 trillion. With the rapid deterioration in the economic activity since then, we would be lucky to eke out a 2.5% real growth in Q4FY20, and a 3% real growth for all of FY21 (with Q1 of FY21 in best case scenario delivering a 1-1.5% growth).
Private consumption accounts for about 58% of the GDP (expected to be about $1.7 trillion even after the unexpected deceleration of the economy in Q4FY20). Hence, the government’s economic war-room participants have to give considerable attention to ensure that various components of India’s private consumption are protected from a demand deceleration to the best feasible extent.
There are a few interesting aspects of India’s private consumption. Merchandise accounts for about 48% (around $825 billion at the end of FY20), and the remaining goes to services. In the merchandise component of private spending, food & grocery accounts for nearly 67% ($550 billion). The next four big sub-segments, though much smaller compared to food & grocery, are textiles & apparel (about $65 billion), jewellery (about $65 billion), consumer durables and electronics, including phones (about $50 billion), home & living (about $35 billion). Besides, consumer spending on automobiles (2W and 4W) in FY20 is estimated to be about $50-55 billion (with another $15-20 billion revenues from the commercial vehicles segment).
The 52% component of private spending (about $875 billion) is on services, of which the largest components include education & coaching (about $125 billion), and healthcare (about $80 billion). Other components include spending on housing, telecom services, financial services and savings, food services, travel & leisure, and entertainment, etc.
Justifiably, every sector and sub-sector would demand an urgent financial intervention from both the centre and the states. There is no choice for the government, but to prioritise and direct the limited financial resources it can squeeze out from an already distressed economy.
Beyond the first round of stimulus that was announced by the FM last week, the government should consider a second round of stimulus that can give some fillip to the crashed consumer-side demand, and also to the MSME sectors so that job losses can be minimised. A few suggestions for the second round of stimulus are:
Provide succour to the informal economy by directly transferring an amount of Rs 10,000 per household (not per individual) to 150 million poorest households across India (out of the total about 250 million households). These 150 million poor/low-income households will include both rural as well as urban. The transfer can be done in two instalments of Rs 5,000 each with the first one around April 21 (by then, hopefully, the country would have started to come out from the lockdown in a calibrated manner) and the second around May 21 (by which time, hopefully, most of the locked-down elements of activity across India would have been opened up). This stimulus of Rs 1,75,000 crore (about $22-23 billion) would almost immediately flow back into the informal economy and provide consumption boost not only for the food & grocery sector but also provide—to a limited extent—a boost to apparel and footwear sector (and then some other areas of consumer spending both in merchandise as well as in services).
Provide succour to the MSME sector (especially, those engaged in the manufacturing activity) by lowering the GST rate on all categories (other than CBUs) of automobile sector (two, three, and four-wheelers, both for personal use as well as commercial use) to a flat rate of 12% for all vehicles sold and registered until September 30, 2020. Automobile industry (including auto-component manufacturers, and myriad service providers) is one of the biggest drivers of economic activity in the country. It can be a powerful lever to give an immediate boost to the economy. The auto sector sales across the board have been seeing a precipitous slide for nearly 24 months. Hence, a short term sharp reduction in the GST rate to 12% may not cause a revenue loss to the government but could improve its collections from the sector if the steps lead to a sharp revival of demand.
Provide succour to MSME sector (again, largely to those engaged in the manufacturing activity) by reducing the GST rate on a wide range of consumer durables and appliances (refrigerator, air-conditioners, air-coolers, washing machines, TVs, small appliances for kitchens, water purifiers, etc) to a flat 12%, again for all sales until September 30, 2020. This particular segment of consumer spending has a large number of local and regional manufacturers of components and final products (in addition to a few large national players). Here again, like in the case of the automobile sector, the government could collect more GST with the lower GST rate compared to what it may collect if demand collapses.
Give the aviation sector an immediate relief by entirely passing on the benefits of low international oil prices through another (and sharper) reduction of the central duties on ATF and then push the states too to do the same. The lowered duties can remain in place until December 31 to allow the airline operators re-build travel demand both for business and leisure travel, and thereby, strengthen their currently precarious balance sheets.
These steps, if immediately announced and implemented, can give an immediate and sustained boost to the economy while also preserving jobs in a big way.
The writer is Chairman, Technopak Advisors (Views are personal)