We need a supportive policy regime so that banks can lend more and there is a rigorous monitoring of end-use of credit

It sounds pretty heartless to worry about the economy and livelihoods and appear less concerned with peoples’ lives. It is difficult to weigh in golden balance whether lives or livelihoods are more important.

On December 31, 2019, China first told the World Health Organisation (WHO) that 41 patients in Wuhan had contracted a mysterious pneumonia not amenable to conventional treatment. Beginning January 23, first the city of Wuhan, then the entire Hubei province and then some other cities were locked down. The unprecedented quarantine was imposed on 50 million people across 15 cities.

After a 6.8 per cent contraction in January-March 2020 quarter, China’s economy recorded 3.2 per cent growth in April-June 2020. China is the first major economy to return to growth after the pandemic.

For us, the pandemic is an imported calamity. The main gateways to India have been worst affected. Major democracies, including India, have failed to emulate the ruthless measures taken by China (and could be taken by China alone) to contain the damage. Maybe there is more than what meets the eye here.

With confirmed infections of over 50 lakh, albeit with a somewhat modest case fatality ratio of 1.64 per cent and a significantly high 78 per cent recovery rate, the first peak is not in sight at the national level although there is significant disruption of economic activity. Individual estimates vary widely with observers’ biases as expected because the pandemic has fooled all forecasting tools. A general sense is that we face stagnation if not outright contraction in economic growth in the current year.

The GDP at current market prices was Rs 45.51 lakh crore, Rs 49.18 lakh crore and Rs 38.08 lakh crore during April-June 2018, April-June 2019 and April-June 2020, respectively. The GDP at 2011-12 prices was Rs 26.89 lakh crore during April-June 2020, compared to Rs 35.35 lakh crore during April-June 2019. This is the direct effect of the lockdown that was in force for almost two out of three months in the first quarter. Experts are divided as to how the GDP is going to behave in the ensuing quarters due to the impact of the pandemic on jobs and incomes.

Another way to analyse the economic impact of the pandemic is to look at GST collections which indicate the quantum of documented sales of goods and services. Monthly GST collections during April-August have been Rs 32,172 crore, Rs 62,151 crore, Rs 90,917 crore, Rs 87,422 crore and Rs 86,449 crore. In August 2019, GST collection was Rs 98,202 crore, so, obviously we are far away from reaching pre-lockdown levels of spending and registering a decent growth on that level. The shortfall from August 2019 GST collection is 12 per cent in August 2020. Obviously, GST collections would not measure the impact of the pandemic on the informal economy where undocumented sales take place on kutchha bills.

The first quarter GDP contraction affected almost all sectors. The only sector that posted positive growth (3.4 per cent) was agriculture, with bumper Rabi crops. High-contact sectors like tourism and hospitality are very badly affected.

Past years’ trends show that the GDP is almost equally divided in the four quarters with some increase in the last quarter. In 2017-18, the contribution of the four quarters was 23.4, 24.4, 25.3 and 26.9 per cent for quarters one, two, three and four. In 2018-19, it was 24, 24.5, 25.4 and 26.1 per cent. In 2019-20, it was 24.2, 24.2, 25.4 and 26.2 per cent. This year’s quarterly GDP trends are going to be abnormal.

If the four quarterly GDPs don’t add up to Rs 204 lakh crore, we are going to have negative annual growth. Just to catch up with the 2019-20 GDP of Rs 204 lakh crore, and quarter one is just Rs 38 lakh crore, we need to add Rs 166 lakh crore in the remaining three quarters.

The catch-up target is stiff because we have to offset a big shortfall of Rs 11 lakh crore in quarter one. Something like GDP of Rs 50 lakh crore, Rs 55 lakh crore and Rs 60 lakh crore would be needed in quarter two, three and four just to maintain the 2020-21 GDP at the 2019-20 level sans growth. With train and air services suspended and localised lockdowns, normalcy hasn’t returned.

The pandemic and the lockdown have reminded most well-off people that they can live with fewer wants. The cost-cutting austerity measures by Governments and corporates mean incomes and even jobs are on the chopping block.

In a crisis like this, borrowings are inevitable to move forward. Long ago, popular culture stigmatised lenders and borrowers. An indebted person felt embarrassed and lenders were reviled. But attitudes have changed over the years and “borrow and spend” is an accepted way of life.

Major economies are surviving on people buying things that they don’t really need and living on borrowed funds. It is a paradox that the richest countries are also the most indebted countries. New aspirational needs are felt or created, new technology is developed to fill those needs and finance is arranged by printing money or borrowings. Governments in particular borrow and spend, leaving the burden of debt servicing on future Governments/generations.

The total worldwide debt was close to a record high of $253 trillion (September 2019), a whopping 322 per cent of the world GDP. It was about 100 per cent of the world GDP in 1961. There is also unreported debt.

The US Government has the highest debt of over $ 24 trillion. Among foreign lenders of the US Government, Japan and China top the list. Of course, a fuller picture emerges not just by looking at the size of debt but also on the ability to repay, roll over/re-finance, to print money without backing of gold and to control good quality productive assets. That is how the game has been going on.

In 1961, the nominal GDP of the whole world was 1.4 trillion dollars and the population was 3.09 billion. By 2017, it had grown to 80.9 trillion dollars and the population had increased to 7.55 billion. Per capita income had grown from $3,827 to $10,632. The total debt in emerging and developing economies climbed to a record $55 trillion in 2018, marking an eight-year surge that has been the largest, fastest and most broad-based in nearly five decades.

To offset the pandemic’s human and economic costs, Governments need to spend more. If consumers and Governments stop spending, livelihoods will be lost and there are too many of them at risk. This is no time to fret about Government debt. We are cursed to keep borrowing and spending, particularly during a crisis. It is a fate akin to that of the mythical Sisyphus moving the boulder up the mountain. Stop rolling it up and it will come down crushing. Riding the tiger is another apt analogy.

The present generation is forced to borrow prosperity from future generations. It will be morally right only if we spend borrowed money wisely and leave scope for future generations to be prosperous. To mitigate the economic distress, we need to facilitate banks to lend more. Unlike the situation in 2008-09 during the global financial crisis, we have better macro-economic fundamentals.  Bank credit is just 50 per cent of the GDP. We need a supportive policy regime and monitoring of end-use of credit.

(The author is an IAAS officer, superannuated as Special Secretary, Ministry of Commerce and Industry)