Economic Highlights
New Delhi, 5 September 2020
Big
GDP Slump
RULE-BASED
RBI FOR A START
By
Shivaji Sarkar
It’s a fall or new beginning. The nation is
pondering over the minus 23.9 per cent GDP crash. The figures are stark but
life goes on. Does the GDP really matter?
The lockdown has plunged India into a never
before crisis. The GDP slump now is likely to worsen to full-year economic
contraction of 7 per cent – or simply negative seven per cent, massive for a
country of 130 crore that wants to take a super leap.
This is the result of routinely jettisoning
financial stability for myopic adjustments in government expenditures, says
Viral V Acharya, former RBI Deputy Governor. Now the growth is prescribed on
government spending by the RBI. Good. Nobody has answered from where the
government, after squandering opportunities since the demonetisation,
accentuated by GST and devastating economy with lockdown, would bring the
precious money. The gold pawning by the Chandrashekhar government in 1990
caused similar concern. Then the growth clocked one per cent.
Again the figures have meant not much for the
nation. Post-1992 budget some companies did exceedingly well at the stock
market. It led to exposure of billion-dollar Harshad Mehta scam. Banks and
financial institutions were denuded. The corrective steps were taken, SEBI was
formed but the banks continue to take the hit.
The RBI is eloquent. It says even in a year
of crisis that began in August 2019, bank frauds jumped to 159 per cent
involving Rs 1.48 lakh crore for public sector banks and Rs 34211 crore for
private ones. During the last 30 years GDP swung up and down but the common man
not only in India even in the US and Europe post-2008 sub-prime crisis lost
several billions. The insurances and mutual funds emerged as more dishonest.
Nations churn out big concerns; hopes and jingoism across the world keep people
busy.
The US economy shrinks by -31.7 per cent, the
British by -20.4 per cent and the fall guy China by -6.2 per cent. Pakistan,
with scant containment, is clocking at least 1.03 per cent growth. India many
might say is in league with the big. May be it is in a better situation with
free food grain doles to 80 crore people. That is indeed a silver lining. Many
families are able to survive. Though now they are being harassed by demands of
production of ‘income’ certificates. Many may cross the illusory poverty line
and be forced to starve. They are people in need and not corrupt as some
officials tend to paint them.
It is also true that since these 80 crore are
not part of the market as they do not generate demand. The job losses, salary
cuts or its non-payment, starvation, and rising number of suicides to four a
minute has led to fall in industrial output to 38.1 per cent, services 20.6 per
cent, and manufacturing to 39.3 may not theoretically have hit them.
India has notionally spent Rs 150,471 crore
for free rice and wheat. The overflowing stocks in FCI silos were paid long
back and do not entail financial burden. Actual hit to the exchequer as of now
is Rs 1930 crore for transportation and another Rs 5000 crore for pulses. The
immediate cost is Rs 6930 crore. But as the stocks are depleting carrying out
the operation beyond November or till West Bengal polls would burden critical
finances.
The present figures are only first estimates.
Informal sector numbers, which are likely to have suffered more, says India’s
former chief statistician Pranab Sen, will be announced later. The entire
non-farm economy has been hit. Agriculture with 3.4 per cent is the silver lining
but it is also having problem in recovering costs. The wholesale price indices’
contraction indicates producer prices are declining.
Gross value added (GVA) that is actual
production value minus taxes contracts by 22.8 per cent. Even the public
administration, defence and other services sub-sectors record 10.3 per cent
fall in government spending. Gross fixed capital formation, in short
investment, contracts 47.1 per cent. However, government consumption expenses
have grown by 16 per cent, much due to inflation.
Even nominal GDP has contracted by 22.6 per cent.
It means base of tax collection, as the GST controversy depicts, will shrink.
More than the government, the central bank,
RBI, is responsible for having dithered from achieving its long-term objectives
of price and financial ability, opines Acharya. It is leading to a situation of
stagnant growth and high inflation – stagflation. It is hitting bank depositors
and market investors creating uncertainties.
The economy is getting more centralised. The
government balance sheet gets larger and that of private sector shrinks. It
hits all but the smaller players more such as the MSME crisis and private
educational institutions. As the economy shrinks government funding programmes
become mainstay in relation to crashing domestic savings and irrational
interest rates. It hits the core of economy. It increases lobbying by the
powerful.
The remedy is in less government and more
free private sector open economy. It also does not mean selling the public
sector jewels like railways, HAL and others. They set the quality standards.
Simultaneously, private sector has to be allowed spaces without direct or
indirect government support. For this the government has to have fiscal restraint
and RBI has to put financial stability and resist fiscal dominance.
The GDP itself is not a big number but its
ramifications are. It is a symptom. The disease is severe – not the COVID-19
but financial failures-2019. As a first the RBI has to assert itself and
instead of suppressing interest rates on savings, it has to increase it to a
minimum of 9 per cent for bank deposits, else the banks would collapse.
It is not for rewarding the saver but to
boost the culture of savings that has been taking care of government expenses,
deficit, all through including of the Hindu rate of growth era. It has to reset
policies and functions like the central bank adhering to rule-based decisions
to save and bolster nation’s finances.
Life will go on but to become a global leader
we need a minimum 8 per cent continuous growth for $ 5 trillion economy. The
central bank has to delineate the path. Disease or not, the nation has to take
a vow that it would not jeopardise normal functioning ever again. Whatever, the
country needs --soft policy, low taxes, no barriers like tolls, open business
and humane approach to solve difficult problems. India with a new beginning can
beat all.---INFA
(Copyright,
India News & Feature Alliance)
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