Government expects full economic recovery in H2 FY21

by Manasi Swamy

The government projected India’s real GDP to contract by 7.7 per cent in 2020-21 in its First Advance Estimates of National Income released on Friday. This would be the worst annual contraction seen by the Indian economy since independence. But, the rather extraordinary takeaway from this estimate is that the economy is seen to be returning to normalcy in the second half of the year.

The advance estimates for 2020-21 when seen in conjunction with the estimates for the first two quarters of the year imply that real GDP would amount to Rs.74.36 trillion in the second half, nearly the same as its year-ago level of Rs.74.46 trillion. India’s real GDP had contracted by 23.9 per cent in the June 2020 quarter amid the strictest lockdown in the world observed to arrest Covid-19 spread. It continued to fall in the September 2020 quarter, by 7.5 per cent, due to slow removal of restrictions. Restrictions remained in most transport, hospitality, tourism and education sectors in the third quarter and many of these are likely to remain in the fourth quarter. However, the government’s GDP forecasts assume that the economy will come back to pre-lockdown levels during this period.

The government projects itself to lead the economic recovery in the second half of 2020-21 by scaling up its final consumption expenditure by 17 per cent over its year-ago level. The Central Government had adopted a conservative approach towards spending in the first half. It had concentrated only on the minimum spending required for providing healthcare facilities and subsistence to the poor amid the lockdown. In real terms, its consumption expenditure declined y-o-y by 3.9 per cent. In nominal terms it was down by 0.1 per cent. This was against most expectations. Governments are generally expected to step up their spending during a recession to kick-start the economy.

Data released by the Controller General of Accounts (CGA) shows that the Central Government started loosening its purse strings from October 2020 as its tax collections picked up. Its revenue expenditure excluding interest payments grew by 17 per cent during October-November 2020. In real terms, the growth would have been in the range of 10 to 13 per cent. This means that the government will have to scale up its revenue expenditure significantly in the remaining months of the year if it has to achieve its own advance estimate of GDP for 2020-21.

The advance estimates imply that all components of the economy other than government’s consumption expenditure would fall y-o-y in the second half of 2020-21, albeit at a much slower pace than in the first half.

The government has projected gross fixed capital formation (GFCF) to contract by 14.5 per cent in 2020-21. After having slumped by 28.1 per cent in the first half of the year, its y-o-y fall is projected to alleviate to 0.8 per cent in the second half. While the expectation is that investment demand would improve substantially in the second half compared to the first half, the low base of last year would also play a role in this. Last year, GFCF had risen by 0.3 per cent in the first half. But, its performance had deteriorated with a 5.8 per cent contraction in the second half.

The government’s assumption seems to be that it would lead the show of improvement in GFCF too. The Central Government scaled up its capital expenditure to Rs.753.2 billion during October-November 2020 as compared to Rs.263 billion during the same period a year ago. Fund raising by private corporates, on the other hand, remained subdued during this period, suggesting that the animal spirits of corporates are yet to reignite. Fresh loan disbursals by scheduled commercial banks (SCBs) to industry and services, after adjusting for repayments, remained in the negative zone of Rs.280 billion during October-November 2020. Fund raising via bond issuances did rise by 13.7 per cent in the December 2020 quarter, but equity issuances were down by 13.7 per cent despite booming stock market.

Nonetheless, some signs of improvement in investment activity in the country are visible in performance of real sector indicators steel and cement. These key inputs in industrial & infrastructural construction activity saw y-o-y contraction in their production reduce to 0-2 per cent during October-November 2020 from around 25 per cent fall witnessed by each in the first half of the year.

The first advance estimates imply a sharp reduction in y-o-y contraction of private final consumption expenditure (PFCE) to 0.6 per cent in the second half of 2020-21 from an 18.9 per cent contraction suffered in the first half of the year. For the year as a whole, the government projects PFCE to contract by 9.5 per cent.

The improvement projected in private consumption in the second half looks quite likely because of three reasons. Firstly, food products account for large chunk of PFCE, 25-30 per cent. The NSO derives its estimate for food products consumption from the supply side. And, agricultural output during the current kharif season is expected to touch a record high. Secondly, consumer product manufacturers and sellers had a bumper festive season this year due to release of pent up demand and fresh festive spending. And finally, the recovery in demand seems to have sustained beyond the festive season as collections of Goods & Services Tax (GST), which is levied at each stage of consumption chain, climbed to Rs.1.15 trillion in December 2020, the highest since its implementation in July 2017. Besides, e-way bills, railway traffic and electricity consumption also rose y-o-y in December 2020.

The government projects y-o-y fall in imports to come down substantially to 11.3 per cent in the second half of 2020-21 from 29.1 per cent in the first half, in line with the recovery in both consumption and investment demand in the domestic market. The fall in exports is also projected to moderate to 5.8 per cent from 10.7 per cent. However, the consequent deterioration in trade balance from a surplus of Rs.1.2 trillion in the first half to a deficit of Rs.143.5 billion is likely to eat into 0.2 per cent of GDP in the second half.

While the economy is showing good signs of improvement across segments, the government’s projections seem a bit aggressive. Interestingly, the economy’s full recovery to the year-ago level in the second half of 2020-21 as envisaged in these projections hinges largely upon the government’s ability and willingness to spend.