Crisis growing as GDP data signals weakening demand, growth impulses

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Driven by a contraction in investment of (-) 2.8% and in exports of (-) 3.6%, real GDP growth has fallen to 4.2% in 2019-20, which is the lowest since 2008-09 when it was 3.1%. On the output side, there has been a fall mainly in manufacturing, construction as also in the two heavyweight service sectors, namely, trade, hotels, et. al. and financial and real estate services. The Indian economy has thus witnessed a downslide even before it entered the Covid-19 year of 2020-21. In comparison, before the 2008-09 crisis, the Indian economy had shown a high growth rate of about 8% on average for five consecutive years. Before the current crisis, the GDP growth had been consistently sliding year after year since 2016-17.

CSO’s provisional estimates for 2019-20 confirm the narrowing gap between real and nominal GDP growth. It highlights that while both real and nominal GDP growth have been falling on an annual basis, the fall in nominal GDP growth has been sharper. In 2019-20, it has fallen to a historically low level of 7.2% as compared to 15.1% in 2007-08 which was the year preceding the 2008-09 crisis. This has serious implications for tax revenue growth, which depends on tax buoyancy and nominal GDP growth. 

These trends indicate that India has entered into the current crisis while being considerably handicapped by weak consumption demand, weak investment demand, weak exports and a weak fiscal capacity to combat the current crisis because of low tax revenue growth. CGA’s data indicate that centre’s gross tax revenues have contracted by (-) 3.4% in 2019-20. As a result the fiscal deficit to GDP ratio in 2019-20 has slipped to 4.6% as against the revised estimate of 3.8%.

The quality of fiscal deficit has also deteriorated since revenue deficit has slipped to 3.3%. Thus, the ratio of revenue deficit to fiscal deficit exceeds 71%, indicating that most central government borrowing has been used for current expenditures. Centre’s capital expenditure relative to GDP in 2019-20 is only 1.7% of GDP. The fall in centre’s gross tax revenues will also adversely affect the share of states in central taxes thereby impacting their fiscal deficit in 2019-20.  

India is thus facing a combination of a chronic problem of falling investment and savings and an acute problem of Covid-19-induced lockdown. In 2019-20, gross capital formation at current prices, as a proportion of GDP, has fallen to 29.7% of GDP. By implication, the saving rate is estimated at 28.7% in 2019-20. At the same time its fiscal capacity to combat these challenges is considerably weakened due to sharply contracting tax revenues of the central government. This trend is likely to be further accentuated in 2020-21.

In 2020-21, the growth outcome will depend on the balance between the positive contribution of agriculture and public administration and defence services, and the subdued performance of manufacturing, construction and the two heavyweight service sectors. Even in 2019-20, agriculture and public and defence services provided a cushion to the falling GVA growth in other sectors.

(D K Srivastava is Chief Policy Advisory at EY India. The views expressed are personal.)

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