Fiscal support: Missing piece in an improving macro picture

The year 2020 ends with relief despite the upheaval and distress it brought with it. There’s a sense of reprieve on both the pandemic and economic fronts all round the world. Vaccine successes have brightened the horizon, lifting prospects of the end of the coronavirus pandemic — hopefully by the second half of 2021.

Economies are also beginning to emerge from their troughs everywhere, some even managing to grow positively as for example, China. These developments are surely a positive endnote.

In India as well, GDP growth displayed quick, strong comeback in the September quarter from a quarter percent drop the previous one. This enormously boosted the economic environment that had already begun to turn up even before from the progressive normalisation and decline in infection rates.

This month’s monetary policy assurance of continuing the easy financial conditions further upholds these spirits and lifts recovery prospects. If there’s one piece missing in India’s macro arch, it is fiscal support. It is time for the government to pitch in with the impending stimulus it has talked about for a while. Is this forthcoming?

By now extensively studied, the September GDP data stood out for its stunning -22.2 percent decline in government consumption over last year’s corresponding quarter; it was -25.5 percent down from the June quarter. The inexplicably severe shortfall is a pull-down to aggregate demand from a component directly representing fiscal policy and, therefore, eminently controllable.

That the government has been wary of expanding expenditure and deficits beyond the pandemic-compelled announcement earlier in the year is well known. Critics have also either commended or criticised this stance on grounds equally well acknowledged or understood. But such a quick shrinkage of this proportion, after a 16.4 percent expansion in June quarter and at a time of signal demand distress was unanticipated.

However, let us give fiscal policy response and support abilities the merit of doubt. Recall that government officials and sources have been regularly reported to say a few things about further or additional spending and the fiscal space available. One, it has often been assured in the past months that government will maintain the budgeted expenditure for this year. Two, it’s also been reiterated that further fiscal stimulation will be specifically timed.

In fact, the Chief Economic Adviser has referred to the mounted bank deposits and noted that any stimulus at a time when consumers cannot or will not spend on many goods and services for want of confidence and risk-aversion will likely end up in savings than be spent. At a recent event, the Finance Minister reiterated that the government will spend for economic support, and will not be weighed down by deficit concerns.

We must take these assurances at face value, and look out for any visible translation of these into actual expenditure. There are early hints that fiscal force is beginning to be applied in the current quarter.

One sign is the overall government expenditure grew 9.5 percent year-on-year in October; since 45 percent of the committed budget expenditure remains to be spent, the improving trend in public spending ought to sustain in the forthcoming months to March 2021.

Next, public capex is anticipated to increase in the second half of this year compared to the first one — capital investments by the railways were reported close to Rs 1 trillion until November end, while the PSUs who are constantly being urged for capex by the government are projected to do so now as many parts of the economy have resumed normal functioning.

However, although these signs may suggest that fiscal policy may not be the drag this was in July-September, the overall demand support from this lever is grossly insufficient when compared to the drop in output, which is -7.5 percent in 2020-21. The loss of wages and incomes that were inferable counterparts of the resounding corporate profits in the last quarter has subsequently surfaced as increased unemployment.

The CMIE’s employments data show steady rise in the unemployment rate from November on; the employment rate itself is stagnant since this July. This will no doubt keep consumption depressed.

Considerable doubt still remains about the endurance of the festive surge in auto, other retail goods’ sales, e.g. two-wheeler sales declined last month. When seen in the light of bare fiscal support, the economic portents for the new year are not too promising. Positive surprises are to be hoped for in 2021.