The second-quarter gross domestic product (GDP) data, which came in at a multi-year low of 4.5 percent, may be greeted with relief since it is not worse than expected. The contraction of the manufacturing sector by 1 percent was largely expected given the shutdowns in the auto sector. The fall in construction too was known given the poor consumption of steel and cement. Weakness in electricity generation was also known quite precisely.
But here are a few things which we didn’t quite expect:
1. The nominal GDP, a number we rarely watch, has come in at 6.1 percent for Q2 and just 7 percent for the first half of the year. This number is scary because it means that all of India’s output, rather earnings before interest, taxes, depreciation, and amortization (Ebitda) grew by 6.1 percent in Q2 when the government was borrowing money at over 6 percent and industry at nearly 9 percent. Why would any company take loans for production, at 9 percent if Ebitda grows only by 6 percent. 2. The nominal growth rate for manufacturing is -1.1 percent, for construction, it is 4.2 percent, for trade hotels and transport it's 6.1 percent. It stands to reason, no one will raise money at over 9 percent for any of these sectors, if the “nominal” growth is non-existent or abysmal. Indeed, manufacturing is actually in recession. 3. Capital formation for the half-year April-September is up only 4 percent versus 16.7 percent in the same period last year. 4. Data, other than the GDP data that came on Friday include the core sector for October, which contracted by 5.8 percent. Almost every item such as coal, electricity, steel, cement contracted. Only fertilizers grew well. 5. The tax data that came on Friday was more alarming. Total direct taxes fell 0.7 percent in October to 1.32 lakh crore. Corporate tax fell 1.2 percent, which could be because of tax cuts. But income tax collections fell by 6.3 percent in October. Does this imply retrenchment? 6. The slump in nominal GDP will have fiscal implications. The Central Statistics Office (CSO) will release the advance estimates for FY20 in the first week of January, when it will only have tax and growth data until November. It will be forced to assume nominal GDP growth of 7 percent versus a budget estimate of 12 percent. This means even if the fiscal deficit was contained at Rs 7.03 lakh crore, it will amount to 3.5 percent of the GDP. 7. Worse tax revenues to the Centre were budgeted to grow by 11 percent, which itself is conservative since the revised estimates for FY19 were higher than actually collected. But even taking the budget numbers as correct, the tax revenues from April-October have grown by just 1.2 percent against the asking rate of 11 percent. The total tax collection could fall short by 1.5 lakh crore, and hence the fiscal deficit could be closer to Rs 8 lakh crore, which means a fiscal deficit of 3.9 percent.
The country has probably got into an economic quagmire, into which it is sinking deeper, even as it tries to struggle out. Many market analysts want the Reserve Bank of India (RBI) to print more money to absorb the additional fiscal deficit. That’s certainly a solution. But we have to ensure that the money printing happens simultaneously with a serious correction of real hurdles to productivity from power theft to a dilatory judicial system to expensive and time-consuming land acquisition to iniquitous and archaic labour laws. Otherwise, the higher monetisation will drive up prices but not growth and we can have an even worse problem of stagflation.
8. Indeed, many experts expect the real fiscal deficit, including those hidden in FCI and PFC and including the states’ deficits, to be at 9 percent, which is the rate at which household savings is growing. If the government’s deficit itself accounts for the entire growth in household savings, what will be left for the private sector to invest, if at all it wants to?