Why the current scenario demands a mid-year economic review on priority

Impact of over-leveraging by companies on the banking sector and disruption caused by Covid-19 make for extremely unpredictable times

The Economic Survey of 2018-19 projected India's economic growth rate at seven per cent for 2019-20. By the time the first and second advance estimates came around a year later, it was scaled down to five per cent.
 

With Covid-19 impacting the economy in March, nobody is now talking of even five per cent growth for 2019-20. Exports have already shrunk by 34.5 per cent in March, the steepest monthly fall in at least 25 years. IHS Purchasing managers' index for services also contracted sharply in March to 49.3 from a level of 57.5 points in February. In PMI parlance, the 50-mark threshold separates expansion from contraction.
 

That was for 2019-20. Now let's come to 2020-21. The economic survey for 2019-20 now seems antiquated though it was presented a little more than two-and-a-half months ago on January 31. Covid-19 has turned everything topsy-turvy.
 

Economic growth was projected at 6-6.5 per cent for 2020-21 in that economic survey. This is in stark contrast to what various agencies are now projecting India's economic growth rate to be. The IMF has pegged it at 1.9 per cent, World Bank at 1.5-2.8 per cent, Nomura at a negative 0.5 per cent (for calendar year 2020) and so on.

The Budget presented a day after the Economic Survey pegged the Centre's fiscal deficit at 3.5 per cent, after using the escape clause of 0.5 percentage points due to the "structural tax reforms" adopted by the government. The government's pruning of the corporation tax rates is settio deliver a hit of Rs 1.45 trillion to the exchequer in a year.
 

No one now talks of the fiscal deficit of this range as various industry seeks a stimulus package of Rs four trillion to a staggering Rs 23 trillion.  Experts are now talking of a Central fiscal deficit of at least six per cent of GDP.
 

Interim report card: a brief history
 

The situation has changed so much that the assessment of the economy mid-way is needed more than any time earlier.
 

With the Budget presentation advanced by almost a month since 2017, the finance ministry scrapped the presentation of a mid-year report card of the economy from 2016-17, which used to be tabled in Parliament in the winter session.
 

At that time, finance ministry sources had said the decision was taken to avoid duplication of efforts.
 

The review was not presented even the next year and was discontinued altogether. Instead, the then chief economic advisor Arvind Subramanian released the 2016-17 Economic Survey in two phases — on January 31, 2017, and August 11, 2017.
 

The mid-year economic review was first presented in 2002, even before it was institutionalised by law under the Fiscal Responsibility and Budget Management (FRBM) Act.
 

In the past, incumbent governments have changed their GDP growth and fiscal deficit forecasts in the mid-year review, from the numbers given in preceding Budgets and Economic Surveys.

This has been more so whenever the economy was grappling with uncertainties. For instance, take the year 2008-09. The three years preceding that fiscal had yielded economic growth rates of at least nine per cent each. Given that the global economy had started showing signs of a financial crisis, there was question mark over sustaining nine per cent growth that year. So, the economic survey presented before the beginning of the financial year pegged growth at 8.5-9 per cent.
 

However, the first quarter yielded a growth rate of just 7.9 per cent. The second quarter delivered even less at 7.6 per cent. This put the first-half economic growth rate at 7.8 per cent.
 

By the time the first half came to close, Lehman Brothers had collapsed among two other key entities. And so wrote the mid-year review of the economy of 2008-09: "As it happened, the global situation deteriorated massively after mid-September 2008 following the collapse of Lehman Brothers, one of the top five investment banks in the US, the collapse of AIG and also of the mortgage lenders Freddie Mae and Fannie Mae. There has been a massive choking of credit since then and a global crash in stock markets. The slowdown that was expected in the global economy became much worse with the US, Europe and Japan moving into recession."
 

The review further wrote: "A crisis of this magnitude in industrialised countries is bound to have an impact around the world, and it did. Most emerging market countries have slowed down significantly and India has also been affected."
 

In such a scenario, the review said it was difficult to precisely forecast growth for the whole year due to uncertainty, though it was expected to be in the 7-8 per cent range. "However, we should be prepared for growth in 2008-09 as a whole to be around 7 per cent," it said.
 

In fact, growth turned out to be 6.8 per cent, after a massive Rs 1.86 trillion stimulus was delivered to the economy.  (This growth rate was later revised many a times and now stood at 3.1 per cent now. But the new data is debatable due to controversies over back series data).
 

The current scenario
 

Fast-forward to the year 2014-15. Though the growth rates hadn't been revised significantly, the mid-year review of the economy, penned by then chief economic advisor Arvind Subramanian and his team, analysed why investments weren't happening and the measures needed to stimulate them.
 

According to its diagnosis, investments weren't happening in India primarily due to domestic fators, not external ones. Though it did not use the term 'twin balance sheet problem', which the next Economic Survey used, it described the roadblocks as balance sheet syndrome typical to the Indian economy.
 

It said these obstructions to investment stemmed from the negative experience of the past few years in which there was excessive inflow into infrastructure and public private partnerships (PPPs). Such a situation led to stalled projects amounting to a staggering Rs 18 trillion (about 13 percent of GDP), of which an estimated 60 per cent were in infrastructure.
 

This, in turn, reflected declining corporate profitability with more than a third of the firms having an interest coverage ratio of less than one. Several companies were in fact borrowing more to service interest component of their loans, the review said.

Excessive leveraging in the corporate sector with median debt-equity ratios at 70 per cent is among the highest in the world. The ripples in the corporate sector have extended to the banking sector, where restructured assets are estimated at about 11-12 per cent of total assets.
 

Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector.
 

This is what the "balance sheet syndrome with Indian characteristics" was, according to the review.
 

The current situation requires these kinds of analysis much more than ever before because the economy is on an unchartered course that is extremely dynamic and unpredictable.

Says Madan Sabnavis, chief economist at CARE Ratings, "Ideally, it should be coming. However, there are uncertainties around. As RBI governor had said, we don't know how long the pandemic is going to last, how long the lock down is going to last, and how much damage done will be done. I have a feeling that the government has taken a similar view."
 

Sabnavis says as of today, no one has a solid clue as to what the state of the economy will be, going ahead, because everything is quite fluid -- will the lockdown be extended beyond May 3? If not, the state governments may have different roles to play.
 

Sabnavis recommends a quarterly review in this fast-changing economic situation.
 

"Having a mid -term review, in fact, even a quarterly review will actually be very useful. If the government comes out with a review at the end June or July, it would give indications to the industry about the measures that the government has in mind for the economy," he says.

GDP growth rate cuts by varioius agencies for India

Entity	Earlier Projections	Latest Projections
Nomura (for 2020)	4.50%	-0.50%
Fitch Ratings (For 2020-2021)	5.10%	2%
Moody's Investor Services (For 2020)	5.30%	2.50%
Goldman Sachs (For 2020-21)	3.30%	1.60%
World Bank (For 2020-21)	6.10%	1.25%-2.8%
IMF (For 2020-21)	5.80%	2%
Asian Development Bank (For 2020-21)	6.50%	4%

Source: Respective agencies