BackClamour grows for stimulus despite improvement in PMI
Centre needs to step up public expenditure via fiscal stimulus to avoid further GDP contraction, say economistsIndia’s economy contracted at a record 23.9% in the June quarter of FY21, and while July infrastructure data added to signs of a slowing recovery
PremiumA day after India’s gross domestic product (GDP) data showed a sharper-than-expected contraction, experts said the central government needs to boost public expenditure through a large fiscal stimulus and avoid a sharp contraction in FY21, at a time states are unable to increase spending due to limited leeway in raising revenues.
India’s economy contracted at a record 23.9% in the June quarter of FY21, and while July infrastructure data added to signs of a slowing recovery as Asia’s third-largest economy faces a surge in coronavirus infections, manufacturing Purchasing Mangers’ Index (PMI) for August released on Tuesday turned positive after a gap of five months, signalling a turnaround in industrial activity.
Madan Sabnavis, chief economist, CARE Ratings, said that while the PMI turning positive in August is encouraging, it does not automatically mean factory output will also turn positive. “The PMI is calculated on a month-on-month basis and, hence, as the economy keeps opening up, will reveal better numbers as production would tend to be better than the previous month. The crux will be not having localized lockdowns which can reverse this trend. This will not mean that IIP (Index of Industrial Production) growth will be positive which is reckoned on a year-on-year basis," he added.
Sonal Verma, chief India economist at Nomura, said the unexpectedly large contraction should clear the air for policymakers to recalibrate their strategies. “If left unaddressed, a longer period of below-normal activity risks knock-on effects on the labour market, SMEs (small and medium enterprises) and ultimately on the banking system... We expect fiscal-monetary policy coordination going ahead, as the RBI (Reserve Bank of India) endeavours to keep long-term government bond yields low, to ensure smooth financing of higher fiscal deficits," she added.
Nomura on Tuesday slashed its FY21 GDP projection for India to a contraction of 11% from 6.1% estimated earlier.
States, on the other hand, are unable to meet the mounting revenue demands on account of coronavirus-related measures at a time their coffers have emptied due to tepid goods and services tax (GST) collections. In the GST Council meeting last week, the Centre gave states two borrowing options to meet the shortfall in GST compensation. However, Punjab, Delhi, West Bengal, Chhattishgarh, Telangana and Kerala—states not ruled by the Bharatiya Janata Party—have rejected the proposal, urging the Centre to borrow to meet the revenue gap.
“The Indian economy is in severe recession. Hike in public expenditure to revive domestic demand need of the hour. But the central government refuses to compensate for GST loss due to covid. They want states to cut expenditure by ₹1 lakh crore. Instead of contra-cyclical, pro-cyclical policy (needed)," Kerala finance minister T.M. Thomas Isaac tweeted on Tuesday.
Economist Indira Rajaraman said regardless of the legal undertaking, the Centre can be more supportive of states. “The Centre has been very niggardly in its support to states. The need of the hour is to quickly ramp up broken supply chains and step up the disaster relief transfers to states to help them cope with the crisis," she added.
“The June quarter GDP contraction is very steep. We expect an 8% contraction in the September quarter. We see a possible positive print only in the fourth quarter. If there is no support from the government in terms of stimulus or support to consumption during the festive season, I think, it will worsen the trajectory," said Sachchidanand Shukla, chief economist, Mahindra Group. In the absence of a stimulus package, the contraction in FY21 could be in double digits, he said.
asit.m@livemint.com
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