Is India Fiscally Fit? - An Opinion

 

OPINION: IS INDIA FISCALLY FIT?

The news about GDP of Indian economy is down by 23% is alarming.  This fall in the second quarter, the most drastic fall in decades, as lockdown restrictions meant to contain the spread of the coronavirus wiped out jobs and businesses. The decline is worst among the top economies of the world, with US shrinking by 9.5 percent, and Japan by 7.6 percent at the same time. 

The data reveals that construction, manufacturing and transportation are the worst hit. Economists opine and agree with the fact that many people in India are informally employed, working in contractual jobs which may not be under the reach of government data collection umbrella, like tailors, autorickshaw drivers, daily wage earners etc.  The quantum of reduction, if one considers the informal sector job loss may be much more than 23 percent is worth noting. A rough estimate is as big as 40 percent.

The official reason for slowdown is the strict lockdown imposed suddenly by Hon’ble Prime Minister to save lives of many. The ruling party mentioned in many forums that the nation has opted to save life than saving jobs which the middle-class people of India thought as the right way of reducing the severity of pandemic. But the million-dollar question remaining for each citizen after listening to GDP decline story is have, we saved jobs and lives? Why the number of affected people from pandemic are not declining and why are we losing the job? One out of these two should have been better than what is happening at present.

The prime Minister wishes the economy to become 5 trillion economy by 2024, the next major election, in which he is expected to be in a ruling side for the third time, In 2019, at the time of earlier election, the GDP was around 2.9 trillion, fifth largest economy of the world, behind US, Germany, China and Japan. But the economists opine that the GDP could be 10 percent smaller by next year rather than expecting upward trend.

India, one of the fastest growing economy of the world, was growing at 8 percent just few years ago. The fundamentals of the economy were strong even with 1.3 billion population.

Countries with strong governments often end up with weak economies, and India, after years of impressive growth, risks becoming one of them. Just a few years ago, India, with a population of 1.3 billion people, was one of the world’s fastest-growing large economies, clocking growth of 8 percent or more.

But a point to be noted is even before the pandemic, the economy had begun to slowdown. Car sales were reduced by 32 percent in August 2019, the largest drop in decades. The structural changes happening in economy, pollution control norms laid down on the manufacturers were the reasons given for this decline. 

All these recessionary crises are not due to pandemic, as the ruling party is claiming at present, It all started two years before, with shadow banking crisis. The liquidity crisis and low demand is like chicken and egg situation which leaves the problem in much deeper planet than what we expect.  The consumption and Investment demand were shrinking in last quarter of 2019 itself. The consumption demand did not come back to the normal after demonetization which took place two years prior to that. When once money goes out from one side it should come back from other side for economy to grow. The root cause of the problem is this rather than pandemic and lockdown.

However, no need to be pessimistic even with all these issues, as the GDP decline is not only because of pandemic. The investors and other people can wait and watch for few more months for the nation to recover.  The decline is sharp because the efforts which the Government and RBI has taken in last two quarter of 2019 has not shown the effect as the business were closed due to lockdown. The effects of investment and consumption booster given by the government shall be seen within few months from now.

One important aspect which determines the time factor is the rate of consumption and rate of private investment. We need to understand that the romance with the market economy will not be seen soon. The definition of luxury is redefined for middle class people of India. The time required for employment generation is based on how fast the business houses adjust their business to the changed consumer and investment behaviors. 

The growth trajectory will be back if the fundamentals of India’s economy remain strong. India can boost its economy again by reclaiming and building on its progressive heritage, young population who are always optimistic about the future. So the answer to the question is India fit is yes, but how much fit  can be estimated only after three month from now.