Bharat Jhunjhunwala
The national economy is faced with serious odds. The forecasts for GDP growth in the present year range from (+) 1.2 per cent to (-) 11 per cent. UN has forecast (+) 1.2 per cent growth; Bloomberg has forecast (-) 0.4 per cent decline; Fitch, Standard and Poor and ICRA have forecast (-) 5 per cent decline; Former finance Secretary Subhash Chandra Garg has forecast a (-) 10 percent decline; SBI has forecast (-) 40 per cent decline in first quarter which, assuming full recovery in the latter three quarters, comes to a (-) 10 per cent decline on annual basis. Lastly, global management consultancy Arthur D. Little has forecast a (-) 11 per cent decline. I think all these are underestimates.
Let us look at the underlying indicators. The GST collections were Rs 105k crore in February 2020, 66k crore in March, 30k crore in April and are expected to be 60k crore in May—a reduction of 36, 71 and 43 per cent respectively in the last three months. It appears that the trend is continuing in June. The numbers of e-way bills generated in May were 2.54 crore that led to a GST collection of Rs 60k crore. The numbers of e-way bills generated between 1-10 June were 87 lakh. On pro-rata basis, the number of e-way bills for whole month of June may be 2.61 crore and GST collections may be Rs 62k crore. That is still 41 per cent down from the “normal” of Rs 105k crore in February 2020.
Let us take a positive view and assume that the economy bounces back half-way to “normal” in July and 100 per cent normal in August to March. The month-wise decline accordingly would be (-) 71, (-) 43, (-) 41 and (-) 20 per cent in April, May, June and July 2020; or (-) 14.6 per cent on annual basis. The trend in GST collections is, I think, a good indicator of the trend in GDP. Hence we may expect a decline in GDP of (-) 14.6 per cent in 2020-21.
As per information available on the website of the Central Electricity Authority, the electricity generation was (-) 30 per cent of programmed generation in April 2020 and (-) 23 per cent in May. Let us assume (-) 15 per cent in June and (-) 10 per cent in July. The annual decline would then be 6.5 per cent. Now, a 30 percent decline in electricity generation in April led to a 71 per cent decline in GST and GDP. Thus, a 6.5 per cent decline in electricity generation may lead to a decline of (-) 15.4 per cent on an annual basis.
The number of urban workers in the country was 13.7 crore in 2012 as per information provided by the National Sample Survey Organisation. The number of urban workers would be 14.8 crore in 2020. Of these, about 75 lakh have already returned to their home towns as per government data. The return is continuing at the time of writing. Let us assume about 1 crore of them return to their home towns. They would constitute about 6.7 per cent of the urban work force. There is little possibility of these returning to the work areas before August, given the continuous rise in the COVID cases.
Many industries in the host states may slow down because of lack of workers. On the other hand, some may adjust by recruiting local labour at higher wages or by substituting labour by machines. I reckon a reduction of 10 per cent in urban GDP due to unavailability of workers. The urban areas contribute 82 per cent of our GDP. A 10 per cent reduction in urban GDP will lead to a reduction of 8.2 per cent in our national GDP. Therefore, a decline in GDP of (-) 14.6, (-) 15.4 and (-) 8.2 per cent is likely to take place in 2020-21 on the basis of GST, electricity generation and migration of workers. The average of these three figures suggests a decline in GDP of (-) 12.7 per cent.
This too is an underestimate. Our growth rate was 10 per cent in 2017 and it has declined to 8 per cent in 2018 and 5 per cent in 2019 and 4 per cent in 2020. Therefore, the chances of GDP growth entering the positive territory beginning August are slim.
My estimate is that we will see a decline of about (-) 15 per cent. The decline will be steeper if we get a second wave of COVID infections. We will be further hard-pressed because of the seeping tension on our borders with China, rise of protectionism in the industrial countries and reduction of remittances from expatriates.
The government is unfortunately engaged in the business-as-usual. It is borrowing to meet its expenditures-as-usual and to provide a stimulus package on the assumption that revenues will bounce back up and enable it service the interest burden on this increased debt. That is not happening. The economy will sink further as the receipts from GST decline and interest burden on the increased borrowings rise.
The government is working on the premise that everything is normal with the economy—the problem has only arisen because of the COVID pandemic. That is incorrect. Our economy is facing structural problems that have led to a decline in growth rate from 2017 to 2020. COVID has only brought these to the fore. In my assessment, these structural problems are the decline of Medium, Small and Micro Enterprises due to demonetization, GST and now COVID; lack of social cohesion due to the Citizenship Amendment Act which is preventing inward foreign investment; and pervasive corruption at the ground level including the judiciary. Rating agencies are hollering for more reforms such as lowering of corporate tax rates, reduction of import duties and opening the few remaining areas for foreign investment. But we have seen that the growth rate has been declining despite progress, even if small, in these areas. Therefore these are not the problems.
The government is assuming to be true the (-) 5 per cent decline in GDP predicted by a number of rating agencies. It is continuing to borrow and is moving to push the economy deeper into the pit. An alternative would be a plan for a (-) 15 per cent decline in GDP, taking the people into confidence and imposing a hefty import duty on fuel. That will put this burden mainly on those who travel more or those who buy goods transported from other states. The common man will be spared.
The import duties will provide the much needed revenues and the government would not have to borrow and pay interest thereon. That will bring some cheer to the economy.
The writer is a formerly professor of economics at IIM Bangalore.