Budget key to ensuring growth in next fiscal: Pronab Sen

Contrary to a majority of economists, who have upgraded their forecasts for the coming quarters after seeing surprising September quarter GDP growth numbers, top economist and former Chief Statistician of India Pronab Sen (In picture) believes the next quarter will be worse than the previous one. The March quarter of this fiscal and June quarter of next fiscal (2021-22) will look better because of low base. If the Union Budget does not instil confidence into investors, and investment does not pick up, the GDP may turn negative even in the financial year 2021-22. Excerpts of his interview with DH.

Q.Economic growth numbers in the September quarter have been better than expected. What is your projection for the quarters ahead?

The third quarter (October-December) will be worse than the second quarter. The quarter gone by had a lot of positives. The factories were shut in April, May and most of June. So, the production got compressed. Secondly, consumers were not able to spend during the lockdown. Hence, there was a lot of pent up demand. Now, the pent up demand has largely gone. The fourth quarter - January-March will look a bit better and the growth will be somewhere between -2% to -5%. On the whole, growth in FY21 will be -12%.

Q.How about the next fiscal (FY22)?

Well, the first quarter of the next year will be positive because of low base. But a lot after that will depend on the union and state budgets. What happened this year was that the states were allowed to violate FRBM. That held up demand because the states had been spending.

If the same extension is not given next year, states spending will be cut. As far as the Centre is concerned, if they decide that they want to go back to FRBM rules,… If that happens, we could be looking at a situation when even the next year we will witness a small negative.

Q.What should be done to avoid that situation?

Cutting expenditure is just a bad idea. If the economy is growing slowly and taxes are not being collected, it should not translate into a cut in expenditures. It should at least be as high as this year, if not more. The Centre has a lot of scope to do that but it is not doing it.

In the first half of this financial year, the Centre has spent less than what they had done last year. In the current year, the gross domestic product (GDP) will be somewhere between Rs 20 lakh crore and Rs 25 lakh crore lower than last year. Of this, about Rs 7 lakh crore is expected to be the reduction in the government’s tax collection. About Rs 3 lakh crore will be the reduction in the corporate reserves and about Rs 10 lakh crore would be the reduction in the household incomes. This will depress demand next year. If the government makes it up by keeping the public expenditure high, then we may get into positive territory in the large part of next year. If it does not and goes for further fiscal correction, then we may see negative growth the next year as well.

Q.Manufacturing Has turned positive in the latest GDP numbers despite industrial production growth remaining in the negative territory… Does that look puzzling to you as well?

No. There is no direct link between the headline IIP and the growth of manufacturing in the GDP estimates and the reason for that is, IIP looks at all manufacturing including manufacturing of inputs whereas, in the GDP estimates, we count only the sub-component of manufacturing which is manufacturing of final goods. So, we can have a situation, where the final goods sector has done well because of the pent up demand, but the demand for inputs may not have been very strong. So, negative IIP figures have not much to do with manufacturing GDP.

Q.In the current scenario, do you expect the government to come up with another stimulus?

I do not think it is necessary to come up with a new stimulus until they implement what they have already announced. If what they had announced is correct, then the Centre’s spending should be Rs 2.50 lakh crore above last year. At the moment it is running below.

We do need additional stimulus but first, they should start spending what they have promised. Services are still hurting very badly. The biggest surprise is that services like defence, public administration, and others in Q2 did worse than in Q1. They need to think seriously about that.

One suggestion for the next Union Budget that can lift the economy and business sentiment.

Public investments have dropped. One promise the government should make in the Budget is that they would increase spending on infrastructure majorly and support the state governments in reviving their infra spending. If the economy looks weak, investments will not take place. Industrialists would like to see hard evidence of the economy looking better. If they do not have that confidence, they will not invest. And, investments are a large component of our demand. So far, investments have looked okay, but most of that is in the projects that have already been started.

The pipeline of the existing project is going to dry up in the next six to 10 months. If new projects do not come up, then investments will be a drag on the economy.