Slipping into Negative Terrain

Context:  Indian economy has slumped sharply due to the lockdown; however, the Government can make a difference by altering its stance on fiscal policy and increasing capital spending.

Economic Growth Prospects

• Depth of the problem: Contraction in 7 out of 8 sectors:

• Public administration has resulted in a negative growth despite the higher fiscal deficit in the first quarter (83.2% against 61.4% last year) due to spending in transfer payments rather than on goods and services.

• Manufacturing and services sectors have been in the negative zone across.

• Negative growth: to be expected for the rest of the year at -6.4%.

• Three-fourths of the economy would be able to operate at a capacity utilization rate of 65-70% and rest in the services category would struggle.

Factors Influencing Future Assumptions on Growth Prospects 

• Process of “Unlocking”: gradual opening up of activities did reflect in the macro-economic numbers. 
• Effect on Production: Localized lockdowns might affect economic activity due to disrupted supply chain.
• Effect on Services: Since services involve social interaction, following distancing norms would restrict the opening of many services like transport, hotels and tourism.
• Effect on Real Estate 

• Supply: is constrained by labour and project approvals. 
• Demand: is constrained due to stressed home loans and rising Work-form-Home ethic.

Way Forward:

• Revival package from the Government in the form of extra-budgetary capital expenditure can act as a game-changer. 
• So far, support from the Government has been more through the indirect route, where food relief for the poor has been combined with more aggressive lending by the financial system.
• Increasing capital expenditure will help in creating assets as well as providing employment, that in turn will boost the consumption and investment