Lately, the January releases from the Central Statistics Office (CSO) about the advanced estimates of national income have a touch of seasonal chill. The estimate of the real GDP growth rate for 2019-20 has touched 5%, falling from 6.8% in 2018-19, continuing a downward slide that started in 2016-17. This is the lowest growth rate since 2008-09, which was the year of the global financial crisis. Indeed, in the entire post-liberalization era, there were only three other years when the growth rate was lower.
The nominal GDP growth rate is even more alarming. At 7.5%, it is the lowest since 1978, more than a decade before the median citizen was even born! As nominal GDP is national income at current prices, it is what matters for tax revenue collection. No wonder the budgetary arithmetic has become a whole lot more unpleasant than what early projections indicated.
Other than agriculture, where growth remains at a low level of less than 3% in real terms, and public administration, where the growth rate remains high, the fall in the growth rate has been across the board for all other sectors. There has been a dramatically steep fall in the growth rates in mining, manufacturing, utilities and construction. The growth rate of private consumption (in real terms) which accounts for 60% of GDP has come down from 8.1% in 2018-19 to 5.7% in 2019-20. The growth rate of capital investment, which constitutes another 30% of GDP, has fallen off the roof -- from 10% to 1%. Only the growth of government expenditure, accounting for the remaining 10% of GDP, has increased from 9.2% to 10.5%. But like the batting performance of tailenders, that is not enough to prop up the overall growth rate.
To complete the picture of a perfect economic storm, two facts stand out. Credit growth has slowed down alarmingly - it was 7.1% in 2019, less than half of what it was in 2018. And retail price inflation rate has increased to 5.54% in November 2019, the highest inflation rate since July 2016, driven by rising food prices. This has been a steady climb from a mere 2% last January. Moreover, oil prices that provided some relief over the last few years are showing signs of upward movement.
Given this backdrop, one must praise the self-confidence of the administration in talking about becoming a $5 trillion economy by 2024 from a $2.7 trillion one in 2019. This is described as a challenging but realizable goal. Well, it will take 13 years, not five, to reach this target with a 5% growth rate. Alternatively, it will take a growth rate of 13% to reach it in five years. These exercises have the same touch of magic realism as calculating the asking rate when a limited-overs cricket match has effectively gone out of hand.
Yes, nothing stays the same and the economy will no doubt recover someday. But it is important not to be in denial about the dire state of the economy at present. Some economic policy advisors are not inspiring much confidence in this regard.
Some are saying that the dip in growth is only cyclical. Of course, anything that goes down eventually will go up and unless it happens within some reasonably short time frame, to say this is a "cycle" is of scarce comfort. With the latest quarterly GDP figures that were released, we now have had six successive quarters when the annual growth rate relative to the same quarter one year ago has been lower than the previous one. If this trend continues next quarter, this would be the longest sequence of dips in the growth rate in successive quarters for the entire period for which quarterly GDP data are available on the RBI website (1996-97). If it is a cycle, then it does seem to be taking time to bottom out.
Some say that it is happening everywhere else in the world. Again, this happens not to be true. Leaving aside the fact that the neighbouring countries of Bangladesh and Vietnam have had higher growth rates in 2018-19, India's growth rate relative to the world growth rate (or, that of low-income countries, if one thinks that is more suitable), has been falling since 2016.
A senior economic advisor to the government recently said that if India has to grow faster, its states have to grow faster. It is hard to disagree with this view as it is true by definition. Logically, then, each state's growth performance depends on the growth performance of its cities, towns, and villages. And in the end, the growth performance of any geographic unit depends on the growth performance of households, which then boils down to the growth performance of individuals who constitute each household. But individuals do not operate in a vacuum, nor do states, so the central government cannot abdicate its responsibility for charting the course of the country's economy as a whole.
What then are the options available to the government as the presentation of the budget approaches?
The budgetary resources are no doubt limited and that restricts short-term options quite a bit. The central government's budget deficit is likely to be 3.7%-3.8% of GDP, breaching the 3.3% target up to the maximal level of leeway that exists. If we add the deficits of the central and state governments (another 3%), and take into account off-budget borrowing, the overall deficit stands at 8% of GDP, which is higher than the supply of financial savings of households. This does limit the scope for significant increases in government expenditure, given that domestic borrowing has reached its limits.
What the government can do, though, is to be selective in choosing what expenditure items should be protected and what should be cut. The key focus should be on making sure those who have the highest propensity to spend have more disposable income as that would provide the demand boost that the economy needs badly. Maintaining or increasing the allocation on schemes that put money in the hands of the poorest - such as rural infrastructure projects, MGNREGS or an expanded version of PM-Kisan that I have proposed elsewhere - as a policy, is both fair and smart from the point of view of stimulating demand.
I am less sure about personal income tax cuts or corporate tax cuts that many are proposing. After all, personal income tax revenues constitute around 2.5% of GDP and corporate income taxes around 3.3%, with the rest coming from indirect taxes. Since the burden of indirect taxes is spread much more evenly across the population as opposed to a much smaller tax base for the direct taxes, this may be a good time to undertake a comprehensive reform of GST to simplify it and make sure the tax burden on ordinary consumers and small business is lightened. Also, the government should resist pressure from the wealthy to cut the long-term capital gains tax. Yes, the revenue yields have been modest but that is because the markets have not gone up that much within the relevant period. As markets rise, revenue yields will increase.
Yes, we need more comprehensive reforms. But when the economy has gone off the rails, pushing it back on track is the main priority, as opposed to improving the quality of tracks so that it can run faster. To achieve that, putting more purchasing power in the hands of billions of consumers and lowering the regulatory and tax burdens on the millions of producers should be the first priority.
(Maitreesh Ghatak is Professor of Economics at the London School of Economics and an elected Fellow of the British Academy.)
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