It’s a bit too early to celebrate V-shaped recovery

India’s economic contraction was deepest among the G-20 countries in the April-June quarter. The country has had the severest Covid-19-related lockdown and the economy has still not fully opened. But India’s direct stimulus to the economy has been one of the lowest. Now, instead of extending a helping hand to the affected sectors and people, the government has started celebrating a V-shaped economic recovery.

First, it was the Chief Economic Advisor K V Subramanian, who said the worst was over and the country had already begun to experience a V-shaped recovery. Then came the finance ministry’s report, which picked up a few high-frequency data that has shown some improvement, and, corroborated the CEA’s remark.

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But, is the worst really over? Does not appear so. Neither from the number of Covid-19 cases (that has been rising at a faster pace than earlier) nor from the four indicators of economic output – private consumption, which measures consumer spending on goods and services, business investment, government expenditure and net exports. Close to 60% of India’s economy is driven by private/personal consumption.

If neither of the above have shown an upturn, then where is government witnessing a V-shaped recovery? Is it only in numbers, which can be at best be an optical illusion. Or, the government is still in the denial mode. It does not wish to give any large stimulus because of its excessive obsession with the fiscal prudence.

From a 24% contraction in the first quarter, if the economy recovers and logs a 12-15% decline in second quarter or an 8% fall by the end of the year, it will automatically look like a V-shape recovery. But that will only be in numbers. The real economy will still remain in the contraction zone.

The question is, viewed from the angle of per capita income of individuals or the states, whose tax burden has immensely increased due to Covid-related slowdown, are we anywhere closer to the V-shaped recovery?

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A recent State bank of India research shows that the jump in public debt of at least 10 states including Maharashtra, Tamil Nadu, Haryana, Karnataka and Kerala is 0.7 times that of the Centre because their per capita income loss is more than the central average. The states’ fiscal position is expected to worsen further after the Centre has asked them to borrow individually to fund their expenditure gap arising out of GST implementation and Covid-19-related slowdown.

The states' GST collection for April-June quarter has been just 54% of the corresponding quarter last year. Besides, states’ VAT, excise, stamp duty and registration have substantially come down due to the lockdown. Combining the SGST and other taxes, the total losses of top 20 states is estimated at Rs 1.20 lakh crore in the April-June quarter itself.

Unless the Centre provides funds to states, they will have to drastically cut their capital expenditure.

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Even if some BJP-ruled states adhere to the Centre’s proposal and agree to borrow from the market, the limit to which they can borrow is only 3% of their GSDP. The limit has been set by the Centre itself.

The Centre, on the contrary, has no such limits. The Centre can increase its borrowings according to the need.

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The concern that comes in the way is what if the fiscal deficit balloons. But the Fiscal Responsibility and Budget Management (FRBM) Act permits exceeding annual fiscal deficit targets on the grounds of national security, acts of war, national calamity, collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, decline in real output growth of quarter by at least three percentage points below its average of the previous four quarters.

The Centre very well qualifies on more than one parameters to relax its fiscal deficit target. Why, then, the obsession with the fiscal deficit in such difficult times?

Even if the Centre does not want to borrow, it can release money to states from the National Disaster Response Fund (NDRF). After all it is a fund managed by the Centre for emergency response to any disaster situation or disaster. Covid falls into that category. The Budget for 2020-21 has provided for Rs 25,000 crore to NDRF. So far, a little above Rs 16,000 crore have been withdrawn. According to experts if the Centre does not come forward with a large direct fiscal response soon, it may have to face a deep contraction in the July-September quarter too.