The latest numbers relating to industrial production, retail inflation and international trade were released in mid-June, on the back of the fiscal numbers for the April-May 2020 period. A careful reading of these numbers reveals a huge fall in industrial production, breakdown of the ceiling on inflation target, massive collapse of international trade and questionable financing pattern of fiscal deficit. This development, when seen with the estimates of a projection of a deep recession (within a range of -3.2 per cent as per the World Bank and -4.5 per cent as per the IMF) coupled with a general government (Centre and States combined) fiscal deficit-to-GDP ratio of 12 per cent (estimated by the IMF) unfolds glaring weak spots in the Indian economy.
The Indian economy was already amidst a considerable slowdown in the pre-Covid period. For example, the fiscal 2019-20 GDP growth rate was recorded at 4.2 per cent for the full year and 3.1 per cent in Q4. The authorities struggled with the combination of countercyclical monetary policy (160 basis-point reduction in policy repo rate) and fiscal policy (4.6 per cent fiscal deficit-to-GDP ratio as against the Budget estimates of 3.3 per cent) to move the economy out of the downswing. Retail inflation measured in terms of consumer price index-combined (CPI-C), the official inflation measure in India, was above the targeted ceiling of 6 per cent consecutively for three months beginning December 2019, recording a rate of inflation within a range of 6.58 per cent in February 2020 and 7.35 per cent in December 2019.
This is as bad as it could get. If numbers do the talking, they show in the midst of unchartered waters, a never-before kind of perfect storm through the dark clouds of which it is difficult to see ahead.
The onset of Covid-19 has only served to worsen what was already a dismal economic picture. The net result is the likelihood of a recession in the current fiscal as alluded to earlier. It is important to note that Indian authorities have not released any official estimate regarding GDP growth rate for 2020-21 for reasons known best to them.
The numbers of industrial production for the period April- May of current fiscal divulge that not only the general index has shrunk with a negative growth of 45.8 per cent but the components such as mining (-23.94 per cent), manufacturing (-52.07 per cent) and electricity (-19.01 per cent) have also collapsed. It is interesting as well as instructive to mention that the deterioration in the industrial production began in February 2020 (-3.1 per cent) and further declined in March 2020 (-18.3 per cent).
The retail inflation data showed that the headline inflation remained above targeted ceiling of 6 per cent in Q1 of the current fiscal, varying within the range of 6.27 per cent in June and 7.22 per cent in April. While protein inflation contributed largely — besides vegetable and fruits — one interesting development has been inflation in personal care and effect (primarily toilet articles), which was 12.43 per cent in June and around 10.7 per cent in April and May. This could be due to the unusual high demand for soaps and sanitisers.
Let’s turn to the fiscal developments. There are no official revised estimates of fiscal deficit-to-GDP ratio disseminated by Indian authorities. But the IMF in its June 2020 World Economic Outlook (WEO) has projected a 12 per cent fiscal deficit for the general government. There are some conceptual differences between the IMF and the Indian authorities in the definition of fiscal deficit. Mainly, while the disinvestment proceeds are taken as receipt by Indian authorities, IMF does not consider this item.
Nevertheless, a fiscal deficit of 12 per cent or a shade lower than this is a high number and never in the past was such a number been seen. The maximum fiscal deficit-to-GDP ratio we had in India for the general government was 9.6 per cent in 2001-02. This is before the enactment of the FRBM Act. After the Act was implemented, the government sector has recorded a fiscal deficit of 9.3 per cent of GDP in fiscal 2009-10 as a fall out of global financial crisis (GFC). We could finance this, as the financial savings to GDP were 10.5 per cent and the GDP growth rate was 5.4 per cent in 2001-02. In 2009-10, financial savings to GDP was 12 per cent and GDP growth rate was 8.6 per cent. Today, we do not have this comfort. With the onset of a massive recession, the financial savings would plunge, on a rough estimate, to a subpar 6-7 per cent of the GDP.
There could be external financing received by government. This trend has already been noticed in the Controller General of Accounts (CGA) data. As against the Budget Estimates of ₹4,602 crore during April-May 2020, the amount mobilised under external financing has been ₹29,099 crore. One wonders what could be the source of this huge jump. Second, another item was National Small Savings Fund, where as against ₹0 in the BE, the amount collected in two months has been ₹53,090 crore. This remarkable increase could be questionable and begs further clarification regarding the investors in these funds.
Another important source of financing is money finance. In common parlance, this could mean printing money by the RBI in terms of providing liquidity support to banks, NBFCs and primary dealers, besides transferring dividends to the Central government. In the interest of maintaining fiscal transparency and budget integrity, the authorities should make a statement that they have taken a pause on the FRBM Act.
There is some clamouring by a few experts and analysts that the fiscal stimulus is inadequate and more stimulus should be provided. It is important to mention that more fiscal stimulus means more money finance, which carries the potential of inflation. The moot question in this: Is the Indian economy prepared to absorb the effects of stagflation (recession with high inflation) for a prolonged period? We do not have a strong fiscal space nor do we have a cushion on inflation, particularly food inflation. Therefore, it must be clear that more fiscal stimulus could have unintended consequences of derailing the recovery and pushing it further away.
That opens another important question: Will there be quick revival from this situation? There is no definitive answer. In these testing times, fiscal and monetary stimulus are usually welcome. However, accounting norms should be rule-based.
In the light of the numbers as discussed above, statements of the kind being heard in some quarters that the economic situation is “not too bad” indicate misdirected optimism. Revival of the economy from the present juncture is of course important. But even more important is working toward growth that can be sustainable and non-inflationary. This would mean stimulus packages through money financing are not always the best way forward.
Through The Billion Press. The writer is a former central banker and a faculty member at SPJIMR. Views are personal