How much better can FY22 be?

FY22 was once projected to be 13 per cent higher than FY20. Can six months of lockdown bring growth down to 1 per cent?

India appears to be well on its way to putting the Covid-19 pandemic behind it, as new cases and deaths continue to fall even before the mass-vaccination campaign. Its economic impact, however, is still being discovered. In the last few months, economic momentum has continued to surprise positively. Consensus estimates of real gross domestic product (GDP) growth in FY21 have begun to reverse the steady downgrades seen from March to September last year, moving from a bleak 10 per cent decline to predicting a slightly more positive 8 per cent fall now. Growth forecasts for FY22 have also been inching up.

How will the GDP in FY22 compare to GDP in FY20? Early last year, before the pandemic-induced lockdowns, consensus expected FY22 output to be 13 per cent higher than in FY20. Then the downgrades started, and at the bottom a 1 per cent decline was forecast. Over the past month, this has slowly crept back into positive territory. There is some time lag between economists revising their forecasts and those forecasts showing up in the consensus database: Going by forecasts of a smaller sample of economists, this number should already be in the 1 per cent to 2 per cent growth range.

As we go about assessing whether these are realistic, pessimistic or optimistic projections, we must start with the observation that pre-pandemic, India had an annual growth momentum of around 6.5 per cent. This came partly from a growth in the labour pool, and partly from rising productivity, driven by improving infrastructure, education, healthcare, among others. If the growth decline between March and September this year was only due to curbing of activity, the removal of restrictions should drive a rapid normalisation. After all, the drivers of potential GDP were still in play: Growth in the labour force and productivity improvements. If one assumes that for six months starting March 15, 2020, all progress stopped, as if the economy was sent into a deep freeze, and then restarted fully, one would lose a fourth of the 13 per cent growth that would have occurred between FY20 and FY22 without the lockdowns. That is, for six months out of the 24, one saw no progress. This would bring 13 per cent down to around 10 per cent.

Now let us fine-tune this number: Neither did all activity stop during the lockdown, nor are we at normalcy now. On the negative side, several areas of the economy, such as education, are still restricted, which can push the 10 per cent lower. That nearly half the students have not had any access to education, non-Covid healthcare is still not normal, and routine vaccination programmes slowed are also likely to have longer-term economic consequences. Job seekers and employers have not connected: This friction in the job market (unfilled openings on the one hand and joblessness on the other) hurts growth. On the positive side, based on GDP data, investments (that drive productivity) fell only 28 per cent in the first half, far lower than the “stop the clock” assumption made in writing off growth for all six months. In fact, several productivity boosting changes accelerated: Formalisation picked up, the year-on-year growth in Unified Payments Interface transactions is now higher than it was pre-pandemic, e-commerce penetration has seen a quantum jump even for categories like staples and furniture and online education has leaped forward. Even improvement in physical infrastructure like the provision of piped water to 20 million new households in this financial year boosts productivity (readers can imagine the time wasted if piped water supply into their houses stopped due to some accident).

On balance, therefore, from the perspective of productivity, positive adjustments overshadow the negative, and the estimate of 10 per cent does not need to be revised down meaningfully.

Illustration: Binay Sinha

Let us then move to the economic scars from the lockdowns that can hurt future GDP growth: Businesses that wound up, reconfigured supply chains that meant some customers were lost forever, trading businesses that literally ate into their working capital, or households that were forced to shed assets or take loans. For most firms, investments are funded from retained earnings of prior years; reduced profits thus impair their ability to invest for at least a year. Over and above the actual lack of capital is the damage done to investment and consumption sentiment for firms and households, respectively.

Early in the pandemic, in a thought experiment (“Can we stop the clock?” Business Standard, March 31), we worried that the running counter of fixed costs (like interest, rents and salaries) would hurt company profits and thence their future investment capabilities. Corporate results for the listed firms in the June and September quarters though suggest that they were able to bring down salaries and other fixed costs substantially, and reduce the impact on their own profitability. This was achieved mostly through cost cuts upstream (that is, pushing the pain to their suppliers, who did the same to theirs), which eventually meant lower income for wage-earners and lower profits for smaller firms.

For households in aggregate, lower wages were offset by the lower consumption forced by the lockdowns—“did not earn, did not consume”. But within households, earnings of lower income deciles were more affected than their ability to reduce consumption (“The post-lockdown scars”, Business Standard, November 3), whereas the upper income deciles mostly exited the pandemic with more financial assets. The consumption ability of the latter has minimal lasting impairment. While the repair of low-income household balance sheets may take a while, the impact on the overall economy may be limited. Not only do the top 10 per cent of the population consume as much as the bottom 50 per cent, the latter also do not have much discretion in their consumption.

The impact of the economic scars too, therefore, are unlikely to be so large as to bring a 10 per cent growth estimate down to 1 per cent, implying that current FY22 GDP forecasts may need to be revised meaningfully upwards. The only remaining risk is global growth momentum.

A reasonable part of these expected upgrades are likely already priced in by the equity markets. However, this raises important questions about the country’s fiscal targets too. As the state and central governments go about preparing their Budgets for FY22, their estimates for nominal GDP growth would form the base on which revenue receipts are projected. It is possible that the government(s) choose a number that statistically looks more credible and defensible, but which may be too low and low-balls tax targets, and potentially overstates the fiscal deficit.

The writer is the co-head of APAC Strategy and India Strategist for Credit Suisse