Aggressive infra spending is key to reversing pandemic impact, says CARE report

Our Bureau Mumbai | Updated on May 28, 2020

‘Reviving consumer demand amid growing joblessness will be a challenge’

There could be a strong case for the government announcing an aggressive infrastructure spending plan of 1-2 per cent of the GDP to boost investment and employment to begin with to reverse the adverse impact of the Covid-19 pandemic on the economy, according to CARE Ratings.

The credit rating agency, in a report, said the prospects for FY21 in terms of consumption, investment and growth would depend on how soon the nation eases the lockdown and permits economic activity to commence.

“Second, the response of individuals would be critical to the resumption of this consumption cycle. The reverse migration and unemployment would be major pain points here.

“Third, industry would invest more depending on demand conditions and it is here that the infra push of the government can make a difference,” opined Madan Sabnavis, Chief Economist, CARE Ratings, and his team of economists, in the report.

The problem of domestic fixed capital formation, which is the investment rate, is likely to persist in in FY21 too unless there is a fresh round of government stimulus, said the report.

It added that there has been limited private investment in the last couple of years with the bad loans issue surfacing.

“So far most of the measures have been in the form of supply side incentives. On the demand side it has been restricted more to relief operations which are current in nature and not in the form of capex. This is something which may be taken up by the government during the year,” said the report.

The agency observed that the capacity utilisation rate has been irregular and after showing some signs of pick up in FY19 has declined in the first three quarters of FY20 and is likely to fall even further in March given the shutdown as the year-end ramp-up of production was not possible.

Demand revival vital

So going ahead, a substantial revival in consumer demand is also required during the year which will be a challenge given that the levels of unemployment, as per CMIE, have increased, which is likely to hamper discretionary spending, the report said. The lockdown has further added to the uncertainty, which has to be reversed, it added.

The clamour for revival of demand is palpable today as this is required to bring in investment on the non-infrastructure side. The agency’s research team said currently, the outlook looks cautious, given the level of capacity utilisation in Indian manufacturing as per RBI’s studies.

“We expect GDP growth in Q4 (January-March 2020) to be 3.6 per cent with the headline number coming down to 4.7 per cent for the entire year. Growth was 5.1 per cent for the first 9 months and would come down to 4.7 per cent by our estimates.

“Considering that growth is expected to be a substantial negative in Q1 (April-June 2020) of FY21, the downward trajectory will be exacerbated this year and can show positive signs only post Q3 (October-December 2020) FY21,” the report said.

Published on May 28, 2020

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