Assuming, and this is a core assumption, that the fiscal stimulus announced by Finance Minister Nirmala Sitharaman in two tranches totalling Rs 2.1 trillion is spent in the current year and no further fiscal stimulus is announced, then I am looking at a GDP contraction of 10.8 per cent this fiscal year.
GDP growth in the fourth quarter (Q4) of FY20 was also the lowest in 69 quarters. How do you see this panning out in FY21?
I am projecting negative growth for the first three quarters.
Will there be a jump in Q4?
My estimate is that it will be little over 2 per cent growth in Q4.
You are assuming that no more stimulus is given. What should the government do since it also faces a resource crunch?
This is complete nonsense that the Centre is facing a resource crunch. Yes, it is true for states. Any entity that has the power to print currency notes does not have a resource crunch. My fear is that states would run into borrowing problems. The government has allowed them to borrow another 2 per cent of their respective GSDP. But states might not be able to do that at exorbitant interest rates. Already, Kerala is paying 9 per cent. My fear is that state governments might be forced to cut down on expenditure. If that happens, the growth problem will be worse because that would add to the contraction.
Are you prescribing monetisation of the fiscal deficit?
Everything depends on how you work it out. The fiscal deficit is going to be much worse simply because revenues are going to take a hit. The additional borrowing plan of Rs 4.2 trillion that the Centre announced was essentially done to meet revenue shortage. There is no additional expenditure.
Even the package that they (the Centre) have announced, they will have to borrow another Rs 2 trillion. You have got Rs 6.2 trillion to borrow. They will be able to raise this fairly easily since banks are sitting with cash and have parked around Rs 8 trillion in reverse repo. Reverse repo window gives 3.5 per cent, government bonds give them 6 per cent. If the government has to provide more stimulus, they will have to borrow Rs 2 trillion more, though I don’t think that they will, since states have to be given a part of that. So, there will be no further room in terms of the current liquidity availability. So, further stimulus has to be entirely monetised.
What kind of stimulus do you prescribe?
The question is what is the government’s ability to spend? There are a few obvious items on which it should. The foremost is to pay all its dues as it owes huge sums of money to states, exporters, and its vendors. All this adds up to another Rs 2 trillion according to my estimates. The second item is to increase and extend direct benefit transfer (DBT). Currently, only Rs 500-1,000 a month is given, it should be enhanced to Rs 2,000 per month. And it should be given for four more months. That will take up another Rs 1 trillion. Over and above this Rs 3 trillion, according to my estimates the government will have to spend Rs 5 trillion. Although the need is larger, the government can’t do more than that because of absorptive capacity of the economy.
Won’t monetisation of the fiscal deficit lead to inflation?
No. Inflation will happen either way. You are looking at a choice between demand remaining where it is and supply coming down or raising both demand and supply. If you don’t provide stimulus, supply will come down by 11 per cent. It would lead to a spike in inflation because of supply-side shortages. If you give additional stimulus, then it would contract by 6 per cent, instead of contracting by 11 per cent. You are essentially gaining 5 per cent of your GDP if you monetise the deficit.
Is there a way to tackle inflation then?
We will worry about inflation when it comes. The big issue is whether that inflation would be food inflation or not. That depends largely on your ability to manage food. At the moment, you already have a bumper crop. The meteorological department has said there will be a normal monsoon this year. So, prices of food items will start reducing. Everybody keeps thinking about 2009 that there was double digit inflation then. But you forget that that year saw the worst drought in 30 years.