Diwali has come a little early this year for most sectors, after a dismal three quarters of Covid-induced decline. From automobiles to consumer durables, retail to rural, everyone is reporting a revival in demand.

In fact, healthcare entrepreneur Sangita Reddy, who is also the president of the Federation of Indian Chambers of Commerce and Industry currently, ticked off the reasons why she feels that “green shoots” of economic revival are alive and doing well:

The Purchase Managers Index for manufacturing, widely seen as a proxy for business-to-business demand, has returned to optimistic territory, at 58.9 for October, which is a further increase over the already positive September level.

Reddy also points to the increased e-way bill volumes, growth in exports and, of course, the sharp increase in the GST collections (October mop up rose to peak pre-Covid-19 levels of the plus-₹1-lakh-crore mark) as further evidence that growth is back.

At first glance, the numbers seem to back this optimism for the near future. Factory output, as measured by the Index of Industrial Production, could well manage to return to positive territory in September (the data comes with quite a lag), after contracting till August.

For some sectors like automobiles, widely seen as a bellwether for the manufacturing sector as well as consumer sentiment, pre-festival demand and sales have been robust. Other high frequency data, like fuel sales, electricity consumption etc, all proxy indicators of economic activity are also showing signs of growth.

Does that mean that the pandemic has done its worst and it is back to business as usual for the India Growth Story? Despite stock market indices soaring to new highs, this may not strictly be true. Markets in any case were rallying more because of positive news on the Covid vaccine front and the Biden-Harris win in the US rather than these green shoots, which are still the merest sprigs (most of the positive data has happened over at best the past two months).

There is also plenty of other evidence to suggest that the recent demand surge may be a “relief rally” after unlocking from the world’s toughest lockdown, a good monsoon boosting rural demand, and of course, the upcoming festive season unleashing some pent up “animal spirits”. Retail car sales, for instance, where new vehicle registrations are still below pre-Covid levels, though ex-factory sales are booming as inventory builds up.

But the most worrisome indicator is jobs. According to the same PMI survey, employers reported payroll reductions for the seventh straight month in a row. India is notoriously poor in tracking and reporting jobs data but there are some indications.

According to a survey by the SKOCH Group, as many as 2.5 to 3 crore jobs losses had been reported in the MSME sector this year. According to CMIE data, more than 60 lakh white collar jobs had been lost between March-August this year. Another survey by Local Circles, found that 78 per cent of small businesses in India have cut employment in the past eight months

So the green shoots may not really sustain on consumer demand for too long. Unless the jobs return, you won’t have enough earning consumers who will go out and buy things. After all, one business’s employee is another’s consumer.

Push govt spending

The only way out is — you guessed it, the government. Heavy spending by government, particularly on infrastructure, does three things — it injects demand into core sectors like cement and steel, the infrastructure so created (like roads) has a further multiplier effect and above all, it creates jobs. More jobs mean more productive employees who in turn become better consumers. It is the ‘virtuous cycle of growth’ that finance ministers dream about.

The reason every government doesn’t go in for this “golden arrow” solution is simple — increasing spends on infrastructure is fine in theory but cannot happen if the monies are not there. And the monies, as far as the Centre and the States are concerned, are manifestly not there.

In fact, only last week, the Centre transferred a second tranche of ₹6,000 crore (the first tranche of an equal amount happened earlier) to States, towards the more than ₹1-lakh crore due to them towards the compensation for shortfall in GST collections.

Just 12 per cent of the dues still leaves a lot of ground to be made up. Moreover, only 21 States and three union territories have accepted the Centre’s “borrow and repay from future collections” plan to meet the shortfall. Those that opted out haven’t got anything.

According to a report by credit rating agency ICRA, of the ₹1.11-lakh crore infrastructure investments planned under the National Infrastructure Pipeline (NIP), about 40 per cent has to come from State governments. The NIP envisages the State’s budgetary outlay on capital investments to be around 1.7 per cent of GDP.

As per ICRA estimates, major States together had a budgeted capital outlay of over ₹5.7-lakh crore for FY2021. However, with Covid-19 wreaking havoc, most States have cut capex by more than 0.5 per cent of GDP already. Overall, ICRA estimates that capital outlay on infrastructure by the States could decline by 10-40 per cent in the current fiscal.

Capex worries

In fact, an ICRA poll of banks, mutual funds, consultants, construction companies, and other stakeholders found that 46 per cent of respondents expect State governments’ capex to decline by 20-40 per cent, while another 28 per cent voted for a major decline between 40-60 per cent, with 3 per cent expecting a severe decline of over 60 per cent in capex spends. Significantly, there were zero votes for an increase.

Overall, ICRA estimates that States may, despite the Centre’s recent GST transfers, stimulus measures and a special Capex loan programme of ₹12,000 crore, still face a shortfall between ₹0.5-lakh crore and ₹2.3-lakh crore in the current fiscal year, depending on the extent of the borrowings availed.

That massive a gap, with a little over four months left in the fiscal, would be impossible to cover. There will also be a cascading effect of unpaid bills to contractors and suppliers for projects already underway, further exacerbating the problems. Unless fiscal deficit norms are thrown out of the window, we won’t be spending our way out of trouble any time soon. Which means the green shoots could just dry up.

The author is a former Editor of BusinessLine.

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