Economic
Highlight
New Delhi, 31 August 2020
RBI, GST, Pvt
Consumption
COVID HITS ALL HARSHLY
By Shivaji Sarkar
Consumption shock from the pandemic is severe
and the world economy devastated. Like the World Bank, the Reserve Bank of
India too is less hopeful of coming out of contraction and even with higher
government spending recovery may be delayed. The Indian collapse is, however,
pre-Covid and started August last year. Since December 2019 finances have been in
a tizzy with cuts in departmental allocations.
Worse, the GST concept itself is floundering in
terms of collections and denying the States their due share. It is an act of
human failure and not “God’s”. Nobody can deny a State its dues and in the overall
count it boils down to about Rs 2.35 lakh crore, according to Finance Minister
Nirmala Sitharaman. Even the tranche, to be paid in December 2019, was paid only
this April. Asking States to borrow after usurping their share is harsh and
they will have to borrow Rs 92000 crore plus service interest burdens. Thus adds
to the inflation that the cess on GST has added.
In addition to this, the RBI annual report
2019-20 indicates negative growth this fiscal. It is critical of stricter
sporadic localised lockdowns disrupting economic activities. Fall in its income
leads to bonus payment of Rs 57.128 crore to Central government, lower by 67.5
per cent from Rs 1.76 lakh crore last year.
The RBI report is concerned about firming up
of inflation caused by disruption of supplies. It says that heightened
volatility in financial markets could also have a bearing on inflation and may
affect households. It proposes that the monetary policy keep a constant vigil
on price movements as official data says the retail inflation touched 6.93 per cent
in July.
India is having to go through difficult situations
and is likely to take time to regain pre-COVID-19 levels despite a small
recovery in May and June, warns the report. The re-imposition of partial and
localised lockdowns is regressive as it is prolonging growth contraction as
investments remain anemic and dents consumer confidence. However, the RBI
expects government’s rural-focused employment schemes to provide a fillip to
rural incomes. In short, the rural sector is supposed to give a push to the
growth as wages contract.
The State governments squeezed by COVID-19 and
delayed release of GST payments have put on hold payment of employees’
salaries. A number of States, including Maharashtra, Punjab, Bihar, Karnataka,
Madhya Pradesh, Tripura, and Telangana have delayed salary payments. The
private sector too has either cut up to 70 per cent of wages or sacked lakhs of
workers.
Insofar as farmers are concerned, they are
not getting the prices for their produce, markets are agog. Wheat is being sold
at around Rs 1600-1700 a quintal against the MSP of Rs 1725 and they are
getting half the price of last year for corn and millet. The RBI contention
that despite contracting wages and falling grain prices mere government job schemes
can raise rural incomes lacks clarity.
The report perhaps realises the anomaly and calls
for managing food grains output at 296.65 million tonnes, a surplus.
Horticulture also reached an all-time high of 320.48 million tonnes. However,
these have not increased farmers’ income. Owing to COVID-19 restrictions it
caused supply side problem and depressed prices for farmers as they could not
reach far-off markets.
All these are impacting demand, the consequence
of which is being noticed in production fall as the IIP numbers recently
demonstrated. The contraction is up to 20 per cent or more in GDP in the first
quarter of 2020-21 due to corona lockdown. Says the RBI: “Private consumption
has lost its discretionary elements across the board, particularly transport
services, hospitality, recreation and cultural activities.” And warns the
situation is unprecedented as it sees an overall thaw – ‘retrenchment in
activity’.
Moreover, the recovery, it notes, will happen
when the non-discretionary spending – expenses that people cannot do without such
as food or essential items -- leads the way till a durable increase in
disposable incomes enables discretionary spending like vacations, and
entertainment. In short, it is waiting for people to have larger disposable income
or spare money with them.
The bank’s survey for July indicated that
consumer confidence has fallen to an all-time low, with a majority of
respondents reporting pessimism about the economic situation, employment,
inflation and income. Some new equities have also come to the fore. White
collar employees can work from home while essential workers have to work on
site, exposed to risks of infection. In areas like hospitality, hotels,
restaurants, airlines and tourism, employment losses are severe. “The poorest
have been hit the hardest”, it admits.
Besides, it is not buoyant about urban
consumption either. It has suffered a bigger blow with drop in vehicle and
consumer durable sales dropping to one-fifth and one-third of a level a year
ago and air traffic grinding to a halt. However, the rural sector is doing marginally
better.
Clearly, the lockdowns are thawing activities
as indicate the total domestic e-way bills’ issuance till the first ‘unlock’ in
June, which increased by 7.3 per cent on a month on month (m-o-m) basis. In
July, it rose by 11.4 per cent m-o-m, i.e. 7.4 per cent lower than a year ago.
Having said that private consumption is not
boosting demand, the report wants the government to increase consumption. It
may be a good suggestion but is fraught with many risks as government income is
hit. If it increases borrowing, taxes would rise further and so would inflation,
thus making it a double-edged sword.
Importantly, the RBI income itself declines
by 29 per cent. Its gross total income has fallen to Rs 149.672 crore as
compared to Rs 194,036 crore in 2018-19; its total expenses are Rs 92,450
crore, including risk provision of Rs 73,615 crore; its liabilities have
increased too. In fact, the bank has underlined the challenges for both Central
and State governments with limited headroom. It results in major squeeze, cuts
in capital expenditure and consequently hits growth. Large government debts and
contingent liabilities incurred during pandemic are challenges for fiscal
roadmap, which calls for credible consolidation plan for debt reduction and
deficit over a medium term.
Its solutions aim at more centralisation of
authority like the GST Council in respect of land, labour and power to drive
structural reforms and spreading development widely. The statement is a
contradiction in itself. The RBI needs to rethink about monetisation of assets
in steel, coal, power, railways and privatisation of ports. These would not
boost demand, a prerequisite for the turnover in economy. Finally, mini-lockdowns
have to end for fast recovery. --- INFA
(Copyright,
India News & Feature Alliance)
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