The government needs to acknowledge its true fiscal deficit so that it can increase its expenditure and put money in people’s hands in order to stimulate demand and investments in the economy, economists said in reaction to the 25-quarter low GDP growth figure.
The government on Friday announced that GDP growth for the second quarter of the 2019-20 financial year was at a dismal 4.5%. Within this, the data showed that private final consumption expenditure (PFCE), a measure of consumption demand, grew 5.06% in Q2, significantly lower than the growth of 9.79% recorded in the second quarter of the previous year.
On the investments side, gross fixed capital formation, which measures investments by both the government and the private sector, grew only 1.02% in the second quarter of this financial year, compared with a growth of 4.04% in the first quarter, and drastically lower than the growth of 11.8% seen in the Q2 of last year.
“There is scope for lower growth than even this,” Pronab Sen, former Chief Statistician of India told The Hindu . “At the end of the day, the non-government sector is in a tailspin. It’s not going to correct by itself. The government has to step in. They need to recognise that there is a real, genuine problem on the demand side, and there is a problem with people’s incomes, and they need to conduct expenditures that will prop this up.”
One major structural problem that the government has created for itself, Dr. Pronab Sen said, is the non-recognition of the true fiscal deficit, which has tied up expenditure, which could otherwise have been released.
“This was pointed out by the CAG for 2017-18 and it has only become worse subsequently,” he said. “The first step is to recognise this problem so that you can start paying your bills and making the expenditures that you have committed to make. The moment you recognise the fiscal deficit, you can tell the RBI that it must start buying bonds, so that this will open up space for the government to issue new bonds. But if you say that you are going to issue bonds as per a 3.3% fiscal deficit, it’s not going to cut it.”
Increasing the ability of the government to spend will help if it is used to put more money in people’s hands, both as a way to spur demand but also encourage investments.
“The role of putting cash into the economy is relevant, but relevant only for the unorganised sector,” said Abhijit Sen, former member of the Planning Commission. “For them, it is quite important because they are a cash economy. They are currently feeling all the problems of a cash economy without cash.”
“As far as the overall growth impetus is concerned, even there, getting the unorganised sector going is important because in the past Indian slowdowns, what has led us out of it has been the unorganised sector,” Dr. Abhijit Sen added.
When the big companies are doing badly, he said, it has been the smaller companies that have been able to secure credit from the banks and invest. “But that is not happening this time around because the banks have not been lending to anyone and the smaller players do not have the cash to invest,” Dr. Abhijit Sen added. “If there is more cash in the economy, they will kick-start something.”
“India is not facing a slowdown, but is in recession,” Arun Kumar, a noted economist and Malcolm S. Adiseshiah Chair Professor at the Institute of Social Sciences said earlier on Friday before the release of the latest GDP figures. “If one includes the unorganised sector, India’s GDP is negative.”
Anubhuti Sahay, economist with Standard Chartered Bank, said, “Whichever way you dissect the data, there is board based slowdown. Whether you look at services or industry, or government versus private, slowdown is pretty evident. In fact the number would have been even worse had the net exports not contributed.
India is a trade deficit economy; whenever it is wider, it takes away a few percentage points from our GDP. But this time, because the trade deficit reduced on the back of lower import and weaker demand, it actually contributed to GDP growth.”
While there is consensus among market participants that growth may have bottomed out, the recovery is expected to be prolonged.
(With inputs from Manojit Saha from Mumbai)