The tale of ‘Kisa Gotami and the Mustard Seeds’ from the Jataka stories goes like this. Gotami took the dead baby and pleaded to Buddha, “My Lord, I will do anything to bring my son back.” Buddha replied, “If that is the case, then I need you to find me something. Bring me a mustard seed but it must be taken from a house where no one residing in the house has ever lost a family member. Bring this seed back to me and your son will come back to life.”
Kisa Gotami did not go back to the Lord.
The Covid-19 episode is a leveler like death. There is no ‘armour’ against the deadly virus until a vaccine is found. It still continues to lay ‘icy hands’ on economies - large and small. The message was clear. All responsible economies - developed, advanced and developing - have to swing into action. As International Monetary Fund (IMF) advised, their “responses have to be swift, concerted, and commensurate with the severity of the health crisis, since the human cost of the pandemic has intensified at an alarming rate, and the impact on output and public finances is projected to be massive.”
Fiscal deficits will rise
There is no exception in the economic expansion and recession cycle. The IMF’s provisional forecast for April was that the global public deficit would be up by 6.2% this year to reach 9.9% of national income - topping levels seen in 2008-9 – following the financial crisis. The latest estimate based on data gathered by various international agencies reveal that the likely average fiscal deficit as a percentage of GDP in 2020 arising out of meeting the health related expenditures and direct cash assistance to the unemployed in the advanced economies (US 15%; Canada 12%; France 9% ; UK 8%; Italy 8%; Japan 7%; and Germany 6%) would be 11%. For others (China 11%; Brazil 9%; India 8%; and Russia 5%), the estimated fiscal deficit would be around 8%.
The Indian economy was on a downward path much before the pandemic began. India’s real GDP has been showing a downward trend since the last quarter (Q4) of 2017. Reflecting the weak GDP growth, tax revenue was also declining. The Covid-19 outbreak contributed to a further decline in growth in Q1 of 2020 due to the lockdown which drastically reduced business activities and consumption besides production in the eight core sectors in March and April 2020.
Falling tax revenue, due to lower income tax, corporate tax, and goods and services (GST) collections and rising expenditures were responsible for the widening of fiscal deficit during the last two quarters of the 2019-20 fiscal. The magnitude of widening fiscal deficits as a percent of GDP in recent quarters and the highest at 5.2% in Q1 2020-21 exceed the legally established target of 3% of GDP laid down by the FRBM Act in 2003 and also the revised target of 3.8% in February 2020.
That brings us to focus on the need for reconciling the long-term target and the short-term needs.
Growth and Fiscal Balance
Table as given in the pdf
(%) (% of GDP)
2017 Q4 8.7 -3.5
2018 Q4 5.6 -3.4
2019 Q1 5.7 -3.3
2019 Q2 5.2 -3.0
2019 Q3 4.4 -3.6
2019 Q4 4.1 -4.4
2020 Q1 3.1 -5.2
Obviously, there is no fiscal space left. Besides fall in consumption, as jobs were lost and incomes disappeared, a crisis of supply emerged as businesses closed, factories stopped working and investments decreased. Interventions by the government are critically needed. Temporary fiscal deficits of sizeable magnitudes at this critical stage cannot be helped if they are aimed “at avoiding permanent economic damage likely to be caused by loss of critical and innovative goods and services.”
Critics are always there to point out the lurking danger of rising public debt (of both state governments and the central government) ratio to GDP, which is presently 72% of nominal GDP. With an eye on the debt ratio and by adjusting the borrowing limit to Rs. 2 lakh crore, the stimulus package of Rs. 20 lakh crore is a mix of direct fiscal burden and liquidity injection. The package amounts to 10% of the GDP. Worried about the already rising fiscal deficit, the government has kept the proposed free cash and food expenditure and cost components associated with collateral loans to a minimum with a view to limit the fiscal deficit to 6% for the fiscal year 2020-21.
Since some of the spending will depend upon on the government’s pace of implementation and others on how many beneficiaries would be under certain programmes, the fiscal cost for the current fiscal year is likely to be around 10% of the total Rs.20 lakh crore package which would be slightly above 1% of GDP.
Latest global assessment
The latest assessment, which is of June 10, is from the Paris based Organization for Economic Cooperation and Development (OECD). In case, there is no second wave of infections in the winter months ahead, the OECD forecast is that there would be a global drop in economic output of 6% this year and a rise of 2.8% next year. If the feared second wave occurs, the global economy could shrink by 7.6%.
The OECD warns, “With or without a second outbreak, the consequences will be severe and long-lasting.” The OECD report does not refer to the growing chorus of disapproval by critics of nationwide lockdowns. The critics claimed that the lockdowns were imposed sooner than warranted and they have failed by flattening ‘the wrong curve’ - and not the contagion curve.
The early lockdowns were indeed effective and it was unfortunate they were lifted too soon. The results are now obvious. The same critics would say now “the lockdowns were prematurely lifted.”!
The OECD Secretary-General Angel Gurria said, “Presenting the problem as the choice between lives and livelihoods, meaning a choice between health and the economy, is a false dilemma. If the pandemic is not brought under control, there will be no robust economic recovery.”
The international rating agencies (Moody’s, Standard and Poor’s and the Fitch) have given lowest grades in regard to sovereign credit for India. The standards of assessment are the ones usual to normal times. They are public debt, fiscal deficit, falling private sector investment, and delays over implementing structural reforms and of course external sector with uncertain oil price impacting current account deficits and poor export performance.
The ratings (Fitch: BBB- ; Moody’s :Baa3) ratings have an attached “negative” outlook, S&P rating, BBB- has a stable outlook. The negative outlook given by Fitch and Moody’s are due to their perceived risks to poor growth and public debt and the fears they would soon worsen. It is feared public debt would reach 84% of GDP from the present level of 72% of GDP, as fiscal deficit would worsen. On the other hand, the stable outlook of S&P is based on the expectation that the economy and fiscal position would stabilize and start to recover from 2021 onwards.
The world perceptions are different from the rating agencies!
India’s foreign exchange reserves surged to India’s foreign reserves on June 5 and touched the half- a – trillion mark, when it reached $ 501 billion on June 5. It further rose to $507.6 billion on June 12.
So, we go back to the Jataka tale. The lesson is clear. In the midst of an unprecedented crisis caused by the pandemic, public expenditures to save lives and livelihoods at same time, no longer a dilemma and the resultant widening fiscal deficits and rising debts are inevitable.
They have to be faced. India’s policy makers need not feel disheartened.
“Do what you feel in your heart to be right, for you’ll be criticized anyway. You’ll be damned if you do and damned if you don’t.” – Eleanor Roosevelt
The writer is a Research Professor, Economics Department,University of Tunku Abdul Rahman, Kampar Campus, Perak State, Malaysia and visiting Adjunct Professor, Amrita School of Business, Bengaluru Campus.