Real GDP is expected to contract by 6-9% in 2020-21. That may be the pandemic’s doing but if the economy doesn’t revive in 2021-22 the government must take responsibility as it must for last year’s growth collapse to 4.2%. The news isn’t good: proxy GVA (Ebitda plus wages) in Q1FY21 crashed 25%, excluding the financial sector. The recovery seen in June and some of July — arising out of pent-up demand — is faltering.
The small stimulus — less than 1% of GDP — is hopelessly inadequate to hold up the economy at $2.7 trillion. To boost decelerating consumption, government must spend at least Rs 5-6 lakh crore immediately; the funds can be used to build and strengthen infrastructure. At least Rs 2 lakh crore can be mobilised by selling stakes in PSUs, including banks, or selling them outright, within the year. Since banks aren’t putting deposits to work, government should tap household savings. That will be cheaper than borrowing in the bond market and it can easily mop up Rs 2-3 lakh crore through retail tax-free bonds.
Given the big cut in corporation tax has not yielded any foreign investment, there’s case to raise it and instead cut GST on some goods. Boosting consumption is critical because right now aggregate demand is way below aggregate supply. Until they see demand picking up companies won’t add capacity; private sector investment will continue to stagnate. And unless jobs and livelihoods are created soon, demand will contract further making it even harder to justify investments. Consumers are understandably scared — bank deposits are growing at 11% — because the government is unable to convince them things will get better. To do that, spends must come in barrels, not driblets.
Spends on construction and real estate can boost employment and catalyse the economy.
Government must facilitate the completion of stalled projects of bankrupt builders by transferring these to solvent realtors. That way, banks too can recover their loans; going soft on insolvent real estate players — especially the restructuring episode ten years back — has cost us dearly by blocking credit that lenders could have otherwise used. Suspending the IBC was a bad idea because it leaves banks helpless when dealing with errant promoters; banks should have the option to approach the insolvency court on a case to case basis, to recoup what they can.
E-commerce can bring in foreign capital to create both skilled and unskilled jobs and at the same time support 10 million kiranas; McKinsey estimates that if the share of modern trade and commerce can be taken up to 20% and digitally enabled supply chains are established, this could generate $125 billion in economic value by 2030 and lift the productivity of 5.1 million storekeepers and e-commerce workers. More digitisation is needed to make the economy efficient and prevent tax evasion. Government must invest in this by picking up the tab for various charges, for instance, MDRs.
The pandemic is likely to have hurt the informal sector more acutely as it comprises smaller firms with limited economic buffers to withstand shocks. If small entrepreneurs are to risk their personal capital to go into business, they need a lot more support and far less interference. The promise to end tax terrorism hasn’t been kept; if animal spirits are to be kept alive, there needs to be a level playing field, rules need to be easy and impartial. As CEOs have pointed out, businessmen can’t always be treated with suspicion.
Corporate India is broke. For a sample of about 1,400 companies (excluding banks and financials) employee costs were flat in Q1FY21 and increased by less than 8% in each of the three previous quarters. Exclude the IT pack, employee costs would probably have fallen in Q1 and increased less in the other quarters. Productivity is poor, and the cash is concentrated in the top 20 firms which make 80% of the profits.
The bright spot is agriculture, the attempts to unyoke farmers from APMCs should pay off. But the bigger rural economy which depends on real estate and construction — is in trouble. With surplus labour and less work, real wages in rural India will stay flat or fall crimping consumption.
The bottom line: consumer confidence is low, small businesses are going broke, unemployment is high and jobs are becoming scarce. The labour-force participation fell from 58 to 49% between 2005 and 2018, according to a McKinsey estimate. Without the private sector, India cannot become a $5 trillion economy even by 2025 or 2026. If indeed, that target is sacrosanct, the government needs to acknowledge this fact. Treat the private sector well, treat everyone equally.