With banks unwilling to lend, the govt must tap retail savings for capex and welfare spend; also, it must increase corporate tax rates
With three-fourths of the country under curfews and partial lockdowns—including large and prosperous states like Maharashtra and Karnataka—double-digit growth in FY22 is now out the window. Indeed, at this point given little visibility on how soon the restrictions will be lifted, even a high single-digit number seems out of reach; what promised to be the year of revival is turning out to be one of survival as the country fights a ferocious second wave and lives in fear of a third.
Virtually every indicator is flashing a distress signal: Auto registrations are at a nine-month lows, factory output has been flat for six months now, sales of residential properties have slowed sharply, and Nomura’s business resumption index is at levels last seen in mid-June 2020, after having fully recovered in February 2021. That is despite all the hype over pent-up demand. Factories may not have shut down completely, but operations have been hampered; for instance, several automakers have cut back production temporarily till the situation improves.
Come September, the mood could change. As the festive season sets in, the sentiment could get a lift. But, that is only if the dreaded third wave eludes us, a fair chunk of the population has been inoculated and we aren’t still scrounging around for vaccines. While this time around, it is the members of the more affluent households that have contracted the infection, rather than dwellers of a Dharavi, the numbers of those who are seriously ill, are fortunately not very large.
So, while the mood may not quite so upbeat, some of the forced savings—and current incomes—will be used up as the festive and wedding seasons roll in. There are, after all, large swathes of the economy that continue to do exceedingly well and which continue to hire; the IT services, financial services, and e-commerce, for instance.
In fact, the entire government sector—a sizeable part of the economy—has been virtually unscathed in terms of jobs and incomes. Moreover, the country’s corporate sector—the larger listed companies—are churning out large profits and the exports sector is faring unexpectedly well. Spends from these sectors should give consumption demand a nice boost; however, as economists have pointed out, while the economy is on firmer ground than it was last year at this time since there is no total country-wide lockdown, there isn’t likely to be any of the pent-up demand as we saw in 2020.
Unfortunately, when it comes to incomes and livelihoods, it is the lower income households that are once again going to bear the brunt of the slowdown. The dichotomy we saw during the recovery, post the first wave, is likely to be exacerbated this time around since several large services-oriented sectors—retail, hospitality, restaurants, aviation, transportation, M&E—will take a while to recover. Unemployment is running at highs at 8.7% with the joblessness in urban areas nudging 12%, the highest in ten months; CMIE estimates 10 million salaried jobs have been lost and a good chunk of workers have stayed put in the villages, which means many more are now living off the rural economy.
The good news, if one could call it that, is that Reserve Bank of India (RBI) has allowed banks to restructure accounts of small borrowers, with exposures of up to Rs 25 crore; even if half the loans are recast, it would bring them some relief. However, with the second wave getting stretched longer than anticipated, there could be a deterioration in asset quality causing lenders to turn even more risk-averse. Holding back credit to borrowers whose creditworthiness may not be all that bad, but who are temporarily in trouble, at a time when they’re struggling to get back on the rails, can prove to be disastrous.
If banks want to simply invest in gilts rather than lend—which is what they did through FY21—the government needs to find a way to put the retail deposits to work. It is better the government taps retail savings—through state-owned entities or specially created SPVs—and spends on projects so that jobs are created. Also, the government should raise corporate tax rates; the profitability of the organised sector is soaring as they take away share from smaller players as seen in the robust GST collections. The net profits for a sample of 358 companies (excluding banks and financials) has jumped an astounding 140% year-on-year for the three months to March to Rs 94,000 crore; the PBT is Rs 1.27 lakh crore.
An additional 10% will not kill them, but will fetch the government some additional resources that can be used either for capex or for schemes like MGNREGS or even on public healthcare. There needs to be some big-bang spending soon to stimulate the economy and also some welfare measures.
The government needs to be mindful that opportunities for the less-privileged will be fewer as India’s potential growth stays at an unremarkable 6% for the next few years. There’s little pride in being the fastest-growing nation in the world if the inequality too is growing and the healthcare facilities are crumbling; that’s a national shame.