Why Q4 GDP numbers will be crucial
On 29 May, the National Statistical Office (NSO) will release GDP data for the quarter ending March 2020. Normally, this data would not have attracted much interest. NSO has already released the second advance estimates of GDP for 2019-20 in February. Real and nominal GDP growth in 2019-20 was projected to be 5% and 7.5% respectively. A quick calculation using the 2019-20 GDP projection and quarterly GDP until December 2019 shows that the March quarter growth should have been 4.7%, same as the December quarter.
But everything has changed. None of these projections hold anymore. And the numbers out on Friday will tell us just how bad things are going to be.
On March 11, the World Health Organisation (WHO) declared the Covid-19 epidemic as a pandemic. Normal economic activity started getting disrupted in India as well. The country announced a stringent lockdown from March 25, putting a complete stop to normal economic activity. The lockdown, with some relaxations, continues till date.
Growing fear around the pandemic and the impact of the lockdown generated large headwinds for GDP growth in the March quarter -- although the latter affected just one week of the month.
If private forecasts are any indication, GDP growth will be nowhere close to the expected 4.7% figure. A research note by Soumya Kanti Ghosh, State Bank of India’s chief economist expects the March quarter GDP growth to be 1.2%.
Another estimate by Pranjul Bhandari, Chief India Economist at HSBC Securities and Capital Markets Private Limited estimates puts this number at 0-0.5%. The collapse in GDP in the March quarter is likely to be followed by two quarters of contraction according to the Reserve Bank of India .
“GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21 onwards. The end-May 2020 release of NSO on national income should provide greater clarity, enabling more specific projections of GDP growth in terms of both magnitude and direction”, RBI governor Shaktikanta Das said on 22 May.
What do these projections tell us?
The first big takeaway is that India may not see a V-shaped recovery, like it did after the 2008 financial crisis. In 2008, GDP growth had been going down since March 2008. It fell sharply in the December 2008 quarter. Lehman Brothers filed for bankruptcy in September 2008. Growth fell to almost zero in the quarter ending March 2009, but recovered sharply over the following year.
The economic deceleration phase India witnessed before Covid-19 hit the economy has been longer than that in the pre-2008 crisis period. GDP growth has been going down, or almost stagnant, for seven consecutive quarters beginning June 2018. A collapse in March 2020 GDP growth and contraction over the next two quarters will extend it to nine or ten quarters. As has been suggested by RBI, the March quarter numbers will give us an idea of the impact of the pandemic on economic activity. The larger the slowdown in the March quarter, the bigger will be the subsequent contraction. After all, only a week of March was affected by the lockdown.
Can the Indian economy recover sharply like it did after the 2008 crisis? This brings up the question of fiscal stimulus. The 2008 crisis struck in the second half of the year. Even then, fiscal deficit for 2008-09 reached 250% of Budget Estimates. Data from the finance ministry’s Controller General of Accounts shows that the fiscal deficit between April and September 2008 was 77% of Budget Estimates, slightly higher than the 54% figure during April-September 2007. A 250% jump by March 2009 means that the second half of the year saw a huge fiscal push. The fiscal stimulus continued for two years, as can be seen from a sharp spike in fiscal deficit levels in 2008-09 and 2009-10. This stimulus was withdrawn in 2011-12 and the fiscal deficit has been declining since then. While the withdrawal of the fiscal stimulus did not bring down growth immediately, things seem to have changed after crude oil prices reversed their declining trend. Because India is a large importer of oil, a fall in oil prices always has a positive effect on the GDP. This implies that the Indian economy has been suffering without a fiscal stimulus even without the pandemic’s disruption. To be sure, it has been argued that the current fiscal deficit numbers are underestimates, as the government has been shifting a lot of its spending to off-budget items.
A reconstruction of actual fiscal deficit estimates by Nikita Kwatra in Mint shows that the actual fiscal deficit follows the same trend as the official figures during and immediately after the 2008-09 crises.
Why is this discussion relevant ? A sharp fall in March quarter GDP numbers will mean that economic activity contracted in the month of March. By 29 May, the economy would have spent three months in contraction. There is nothing to indicate that the government has provided a significant fiscal boost so far. This is despite the fact that it has been lucky with a sharp fall in oil prices. This can lead to a further contraction in demand .
Any efforts to revive economic activity at a later stage will probably require a bigger fiscal push. As revenues would have fallen due to contraction in GDP, financing this push will be more difficult. In other words, the government has already lost precious time in trying to revive the economy.
Analysts confirm such fears. Growth calls for a straight-forward push to demand, but only a limited number of components in the 20.97 lakh crore economic stimulus provide direct support to the demand, and these add up to around ₹1.10 lakh crore, about 5% of the package, consulting firm EY India said in a report.
The latest edition of the EY Economy Watch stressed the importance of boosting investment demand and said the government’s capital expenditure is key to this. “By augmenting this, private investment would also increase through multiplier effects,” it said.
“In fact, the centre’s non-defence capital expenditure has been languishing at low levels of 1.0% to 1.3% of GDP during FY16 to FY21 (BE),” DK Srivastava, chief policy advisor at EY India said in the document’s introduction.
Private investment holds the key to arrest the erosion of India’s economic growth, but a number of growth-supporting initiatives introduced even before Covid-19 could not check the steady fall in this, Srivastava added.
The report is also skeptical about the efficacy of economic stimulus packages announced since March 26. “The typical reform, relief and stimulus packages have been based on insurance schemes (PM Fasal Bima Yojana, PM Suraksha Bima Yojana, PM Jeevan Jyoti Bima Yojana, and Ayushman Bharat) and credit guarantee programs. Their success depends on a number of behavioral parameters in which entrepreneurial decisions of farmers, MSME [micro, small and medium enterprise] entities, managers of NBFCs [non-banking finance companies] and banks etc are involved,” it said.