Why We Should Not Be Surprised If GDP Forecasters Are Wrong; Indian Economy Will Surprise Us

Here’s a prediction: fiscal 2020-21, widely forecast to report negative gross domestic product (GDP) growth by most agencies, is likely to post positive growth, even if the number is very small in the range of 0-2 per cent.

The reason for my optimism, which was articulated partly by two Finance Ministry officials yesterday (23 July), goes beyond the macro and sectoral numbers currently available to us (Rs 91,000 crore goods and services tax or GST collections in June, direct taxes at 80 per cent of last year’s levels in the first quarter, improving PMIs, etc).

The optimism relates to factors we are not weighing adequately because they are difficult to estimate or project.

One, there is huge pent-up demand for both staples and discretionary products. Thanks to the Covid-19 lockdown and movement restrictions, demand temporarily shifted to staples which tended to be immediately important. This is why even in the first quarter, Hindustan Unilever reported only a 7 per cent decline in volumes. Britannia has reported bumper profits.

The rural sector, largely unaffected by Covid-19 and additionally impacted by the return migration of workers from urban areas, will see a huge spike in demand. Both agriculture and government spends are rising in tandem, providing temporary jobs to those who want them.

In urban areas, kirana stores and e-commerce companies have not done too badly, and the latter are, in fact, is robust expansion mode.

Both Amazon and Flipkart are boosting warehousing spaces; the former is creating 10 new fulfilment centres in different cities, and adding 50,000 temporary jobs. Other logistics and delivery companies are also in a mood to expand.

With lockdown mania ending in most states despite the rise in Covid-19 cases, clearly all state governments and the Centre are thinking growth.

This means the recession will be confined to the first quarter, and growth could become positive by the third quarter latest, if not in the second itself (July-September).

Positive growth is a certainty in the third quarter (October-December), as one should factor in a well-timed stimulus around September-October, or latest by December.

Two, the revival in demand – even if temporary – will be sharp because the lockdown period has seen a huge spike in savings. This savings spike will aid consumer demand as long as there is no further damage to consumer confidence.

As at the beginning of July, aggregate deposits in the banking system were up 11 per cent year-on-year, while credit growth has been lower at 6.1 per cent. The savings rate could rise further as the most solvent corporates raise money from the capital market and bring down aggregate bank debt (consider Reliance, which raised a massive Rs 2.1 lakh crore in three months, cutting debt dramatically).

Banks, non-bank finance companies, and others will also be tapping the capital market shortly. The real issues will be in the banking sector, which may be saddled with more bad loans involving the small and medium sector, and will need more capital from the government and the markets.

If the Narendra Modi government wants the expected revival to not stall early, it should quietly write large cheques to public sector banks and privatise the rest after shifting the bulk of the bad loans to a “bad bank”.

In the second half of the year, the Centre can do this easily by monetising the deficit, something it is holding back on for now.

Three, never before have states been as keen on reforms as now. The reason is not far to seek: in the past, states were happy to blame the Centre for any problems and focused on doing as little reform as possible.

With Covid-19, states have seen such a dramatic drop in revenues that they are no longer willing to leave it all to the Centre.

States like Karnataka, Uttar Pradesh and Madhya Pradesh are reforming labour, land and farm sector laws one by one.

If the Centre additionally implements an easier labour code, amends the land acquisition laws, invites foreign capital with cheap land banks and production incentives (already happening in mobile phones and pharma intermediates), and privatises some companies (Air India, BPCL, Concor, etc) this year, we are essentially laying the groundwork for a manufacturing upswing from the next fiscal year, for which investments will start to flow from the second half. Large investments are already being made in healthcare and defence by the Centre.

The difficult-to-explain point about India is that the underlying need to grow is so strong that Covid or no Covid, this energy cannot be bottled up forever. The average Indian need to earn and spend is partly the reason why Covid-19 infections are spreading. India – both state and citizen – has learnt to live with Covid-19. Growth cannot be held back anymore.

The recent buoyancy in the stock markets is partly a reflection of the rise in global liquidity flows, but some of it is about expectations of a quick recovery too.