GDP contraction: Combination of directionless policies and pandemic have hit Indian economy in the gut

Everyone saw this coming and everyone was prepared for the worst-case scenario. The numbers are out, the GDP has shrunk by 23.9%, the worst in G-20 economies. The Finance Minister may want to call this an Act of God but how can the government explain this- India now makes 28 per cent of all COVID cases worldwide. The lockdown failed to stop COVID and it destroyed the economy.

On a day when the Sensex lost 839 points, wiping out lakhs of crore of investor wealth, it was raining bad news, the economy has hit a negative spiral, recovery looks to be slow and distant, the Union government is unlikely to pay states their GST dues and the government has overstepped its fiscal deficit target, which now stands at Rs 8.21 lakh crore, 103.1% of the target for the current fiscal.

The Rs 20 lakh crore package promised by the Prime Minister and declared in five episodes by the Finance Minister have all vanished in thin air. The economy has now been pushed in a ditch and while there might be some recovery in the second quarter as the lockdown was lifted, fact is that the government does not have much gas in the tank to pull it out. While the numbers may recover, the pain is going to get worse in the coming quarters as the impact of this crash is going to be felt by every Indian.

The Finance Minister’s claim that this mess is an Act of God and hence the government is not responsible for the crisis the nation finds itself in. While Ms Sitharaman’s stand is politically understandable, she needs to answer why the GDP growth rate had plummeted to 3.09% in Q4FY20, lowest in 44-quarters.

While the government would like to brand the Q1 GDP crash as a one-time event which was caused by the COVID pandemic, we have a serious problem at hand as revenue collections have nosedived and expenditures have shot up. We are now forced in a situation where the government would either have a huge fiscal deficit this year or cut down expenditure or probably both. What is worse is that the RBI’s financial reserves may not be enough to provide some relief to the government.

It is important to put the numbers in perspective here. The total deficit was budgeted at Rs 8 lakh crore for the current financial year but this could go as high as Rs 13 lakh crore, Rs 5 lakh crore more than anticipated. This would mean less money for government schemes- both in the states and the center. With private consumption collapsing, reduced spending by the government would mean a further slowdown in the economy. In short, things are going to get worse before they get any better.

This begs the question- could the COVID crisis have been handled better? Yes, had the government not allowed the economy to slip into the abyss that it finds itself in. The ‘immunity’ of the economy was lost over the last six years as the government went on one misadventure after another. That may be history today but fact is that crores of Indian families had no savings to fall back upon.

The complete COVID lockdowns may have created an illusion that the government was in control, but the fact is it was just buying time. Kicking the can down the road would be more apt. Lockdown and Unlock may be great phrases for the media but one wonders why would you want to unlock the economy when 78,761 people tested positive for COVID? Fact is that the government was clueless then and is clueless now.

So what happens next? The biggest crisis that we could be facing in the coming months is the governments (both central & states) defaulting on salary payments to its employees. The problem is worse with state governments because the crash in GST collections impacts them more than the central government. Delay in payments of PM Kisan and MGNREGA payments could be another serious problem in the coming months as it would impact grassroots consumption.

The biggest problem, however, is what happens when the RBI moratorium is lifted and people are forced to payback interests and EMIs? Loan restructuring is an option but it would only delay the inevitable as consumer spending is not expected to go up anytime soon. We might see a massive rise in NPAs which may be anywhere in the 12.5-15 per cent range by March, 2021, depending on the revival in the economic activity.

No matter how you look at it or what perspective you have, a combination of directionless policies and the pandemic have hit the economy in the gut. There is more trouble coming our way in the short term but things may improve in the long term. But, as Dr Manmohan Singh said, in the long term all of us are going to be dead.