Major nations are well on the road to post pandemic recovery.
Last week, the Reserve Bank of India, the country’s central bank, lowered India’s nominal GDP growth projection for the current fiscal by 1.5% to 9.5%. After adjusting for anticipated annual inflation of 5-5.5%, this would translate to about 4.0% real growth. Such an estimate is along the lines of the revisions made earlier by the World Bank and IMF, as well as Moody’s, the international rating agency. After a fuller reckoning with the ongoing second wave of the Covid pandemic, which has turned out to be more devastating in its transmission and fatalities than the first, newer calculations have in fact portended greater pessimism in India’s expected growth rate. For instance, State Bank of India, HDFC and Barclay’s have now lowered it to between 7.9% to 8.3% (implying real growth of around 3%). This too has been made conditional on the current bout of health crisis ebbing before the first quarter ends in June; otherwise, they all uniformly believe normalcy would be delayed beyond late July, with growth being redacted further.
All such numbers forecasting future economic change are on the 2020-21 base, which is already 7.3% lower given the first ever negative GDP growth experienced last year. Sluggish progress in 2021-22 would be a continuation of the slowdown experienced in India for the five years since 2016-17, the year when the massive demonetisation exercise was undertaken. Even if a downward revision had not taken place, and the country were to reach the 11% goal (5.5% real growth) set for the current year, the level of GDP this year would have barely been higher than in 2019-20.
After accounting for a favourable average population growth of 1.6% p.a., the 5-year per capita growth consequently works out to a meagre 1.7%. There is adequate empirical evidence to substantiate that like most other places, the epidemic in India too has had an outsized effect on the poor and middle classes vis-a-vis the well off. Assuming that the income growth for those at the upper end has been maintained at the decadal pace of 7-8%, per capita real income of the average Indian has, in all probability, not increased at all. Put simply, most Indians are heading towards becoming economically worse off than they were five years ago.
The two redeeming segments of the economy, however, have been agriculture and the foreign exchange front. While the first has progressed at a CAGR of approximately 3.4% for the past five years, foreign reserves have almost doubled in the last six years. For much of the second half of the previous year, a degree of recovery was also seen in manufacturing, domestic trade, financial services and select exports, while the labour-intensive transportation and hospitality industries were just on the cusp of a rebound before the new wave of the pandemic set in this March. From a common citizen’s point of view, improved production and availability of food items has been a much-needed positive development. On the flip side, a major dampener has been the rise across the board in inflation, both retail and wholesale. Largely because of the increase in prices of primary articles, the latter metric had slipped into double digit territory in May. More than basic food items, the pain was felt in the rise of prices for fuel, cooking gas, edible oils and several manufactured products.
For almost 15 months now, unemployment in India has remained at elevated levels. In the absence of any official employment data being put out in public domain for over two years, most analysts have been going by the CMIE weekly and monthly figures. In May ’21, the number of people without a job had reached a worrisome 14%, even with the labour participation rate having marginally come down. Unfortunately, high unemployment has also been accompanied by a fall in real wages. Even the number of jobs provided under the MGNREGS (the flagship Central government programme in rural areas to prevent the poor and unemployed from slipping into destitution) has fallen by about a third compared to last summer. This seems to have happened despite the number of job seekers under this minimally paying guarantee scheme, reportedly remaining high. In the backdrop of such discouraging macro circumstances, a majority of the average households required to incur significant unforeseen expenditures on hospitalisation and related care of one or more family members getting afflicted by Covid-19, would have seen their lifelong savings disappear or their slipping into almost perpetual heavy debt.
The emerging economic position in India is somewhat at odds with recent global developments, especially the rebound being witnessed in the US, EU and China. Largely on the back of these major economies, the recently finalised World Economic Prospects by the World Bank puts global 2021 GDP growth at 5.6%, the fastest post-recession pace in 80 years. The well-researched report expects China to record a growth of 8.5%, US 6.8%, and the emerging markets and developing economies as a group, 6% in 2021. Similar optimism is forecast for the calendar year 2022. For a variety of reasons, comparing India with the affluent West, Japan and even China is not entirely apt. However, the reality remains that most developed nations seem to have turned the corner on the pandemic, geared themselves to face any re-emergence, and primed their economies with adequate state funding to hasten further economic revival.
No doubt these countries too face rising global commodity-prices; however, this may eventually serve to be a blessing in stimulating greater private investment and production. According to the long-time Harvard economist, Prof Larry Summers, a partial cause of the ongoing US inflation is the Biden Administration’s excessively large stimulus package last quarter of US$1.9 trillion, equivalent to about 70% of India’s annual GDP. Another governmental infusion of $1.2 trillion, over eight years, for the renewal and building of physical infrastructure (railroads, highways, bridges, tunnels, transportation, piped water delivery, urban sewage as well as high speed internet connectivity to every home) is also under discussion between Democrats and the opposition for bipartisan support. In a similar vein, all the 26 Republican state governors, who have returned the federal assistance cheques for the jobless, are blaming the labour shortage being witnessed in several economic activities in the US on the weekly $300 relief provided over and above the normal unemployment allowance.
While matching such sweeping “munificence” is out of India’s fiscal and financial reach, a greater proactive role by the Union Government is definitely called for to provide more meaningful succour to those affected by the second wave, and adequately prepare for another wave. This would necessarily include a near-compulsory, totally free vaccination programme, and equipping the countrywide medical care system with the requisite trained men and material to treat the ill. Leaving such critical interventions to provincial governments, as attempted in the recent spell, would not work since they uniformly lack the required resources and other wherewithal.
Both the Centre and States must also reconsider their prevailing levies, especially excise duties, surcharges and cesses on petrol, diesel and other hydrocarbon-based products. Their sharp price rise has been the single largest contributor to the prevailing inflation. Making state by state changes or doing it one at a time, would not succeed, considering over Rs 2 lakh crore comes to them annually from such impositions. Instead, a quicker way is to bring them under the GST regime by way of another constitutional amendment initiated by the Central Government. Thereafter, the GST Council, in which all states are represented along with the Union Government, would fix the rate to be levied. Even putting this at the highest slab rate of 28% ad valorem, would reduce the total duties to about one half of the current average of 55%. This in turn, would reduce their retail prices by approximately Rs 20 a litre from the current Rs 100 per litre, which is perhaps the highest retail price globally.
We can realistically expect the states to come on board in effecting the necessary statutory changes if the Central government were to simultaneously, along with the initiation of the GST reform process, withdraw the surcharges and cesses it currently levies on corporate and personal income taxes. The current arrangement generates additional revenues only for the Centre and altogether bypasses the states, since such realisations are excluded from the pool of taxes to be shared with states. Alongside, the direct taxation rates for richer individuals and business- entities can be increased to offset the extent of this relief.
The Centre could thereby ensure that additional revenue shared with the states is at least equivalent to the losses they incur by removing their own imposts on petrol, diesel, and cooking gas, etc. In keeping with the emerging global trends, the Centre can also recoup for itself any possible reduction in revenue from such transfers to the state governments by making corporate and individual income taxes more progressive and the ultra-rich and well doing businesses forking out more than they currently do. Additionally, there is a strong case to levy a higher capital gains tax at the margin so that the super wealthy pay more to the exchequer whenever they proceed to realise the enhanced values of their assets.
A more concerted endeavour is warranted to ward off the emerging phenomenon of stagflation—a toxic situation of GDP stagnation, accompanied by rising prices where poor households invariably end up having to bear the brunt of the adverse impact. From a growth perspective as all, the prolonged prevalence of stagflation is uncalled for as it lowers aggregate demand and takes away the incentive to invest and produce more. This could ultimately drive us towards a recession and the Union Government, the big brother in India, along with the Reserve Bank of India, are best placed to pull the nation out of such eventualities.
Dr Ajay Dua, a progressive economist and a public policy expert, is a former Union Secretary.
Part 2 of the article focusing on the various short-term options to kick in the much-needed economic recovery in India would appear in next week’s The Sunday Guardian.