India witnessed a sharp decline of 23.9 per cent in the first quarter of the FY21 after almost 41 years. Well as shocking as it may seem about the decline of GDP by 23.9 per cent, interestingly the GDP has been decline since the last fiscal year, FY19-FY20. In the last fiscal year i.e. ; FY19-FY20, there was a decline of 5.2 per cent in Q1 followed by a decline of 4.4 per cent in Q2 and consequently 4.1 per cent and 3.1 per cent in Q3 and Q4 respectively. In addition, the GVA (Gross Value Added) which essentially reflects the supply or production of the three broad sectors of the economy i.e.; agriculture , manufacturing a nd service sector; also contracted by 22.8per cent. However, the last time a negative growth was witnessed was back in 1979-1980 where the annual GDP growth rate was a negative 5.2 per cent , while the current accounting year’s growth rate is expected to be somewhere between 5 per cent to 6 per cent. Retracing the Indian economy’s performance since the last 70 years, negative growth was first witnessed in 1957-58 where there was mere growth of negative 1.2 per cent. A negative growth of 3.7 per cent was again witnessed in 1965-66 followed by a negative growth of 0.3 per cent in 1979-80 and then it was again witnessed in 1979-80. During the fourth quarter (Q4) of the last accounting year not much was affected apart from the manufacturing sector which experienced a negative 1.4 per cent growth and construction which witnessed a negative growth of 2.2 per cent. However, in the Q1 of the FY21, industries saw a decline of minus 38.1 per cent, services sector saw a decline of minus 20.6 per cent , manufacturing sector witnessed a decline of minus 39.3% , mining sector also declined by a minus 23.3 per cent. Agriculture industry which happens to be the sector India’s population mostly depend on, is the only sector to not have a negative growth with a 3.4 per cent growth. The outbreak of the Coronavirus Covid-19 and its resultant lockdown has declined consumer spending to a great deal. One of the reasons was because of the lockdown which disrupted supply chains leading to less distribution of goods and also the inability to avail services during the lockdown. Moreover, due to the uncertain environment, investment was also hard hit. Increasing consumption demand which is one of the engines of the GDP and also the biggest engine of the GDP could act as a catalyst in the process of reviving the economy. Private Consumption accounted for 56.4 per cent of all GDP. According Mr. Suvodeep Rakshit and Mr. Avijit Puri, economist at the Kotak Instituional Securities and Kotak Mahindra Bank suggested that broadening the consumer base by empowering low and middle income consumers could help boost consumption demand. This essentially means that government has to indulge in direct spending in order for the consumption demand to increase i.e. to give money to the people. But this is where the issue of revenue generation arises. Tax revenue faced a decline of 71.4 per cent in April, followed by 64.2 per cent in May and the condition relatively improved in June with a decline of 29.8 per cent. Fiscal Deficit increased from 35.1 per cent in April to 83.2 per cent. Basically, the government as of now does not have adequate amount of funds to allocate. The government also is in no position to ask the Reserve Bank of India to deficit finance since injecting money in the economy at this time might also lead to high inflationary pressures. Also printing money would add up to the existing national debt. Austerity measures which is basically cutting down on expenditures is out of the question. One remaining way is to borrow from the external and internal markets. Borrowing from any foreign government at this time might come at an expense of paying high interest rates at the same time. While GST was supposed to help accumulate massive collection , on the contrary , the states are now left begging for funds. During the time of Budget 2020 , the biggest shortfall in taxes were already being witnessed. Last year, GST collection already dipped to 19 month low at Rs.19,916 crores . Lastly, all of these facts are nothing but results of mis-management and mis-allocation of resources which has been very colloquially termed as, ‘ Act of God’ , using the pandemic to vindicate the current situation.
Sunday, April 11, 2021