Daily Financial News Analysis – 15th June’20

Table of Contents

Forecasts for GDP

The forecasts for GDP growth in the present year range from (+) 2 per cent to (–) 11 per cent.
The United Nations has forecast (+) 1.2 percent growth.
Bloomberg has forecast (-) 0.4 percent decline.
Fitch, Standard and Poor and ICRA have forecast (-) 5 percent decline.
Former Finance Secretary Subhash Chandra Garg has forecast (-) 10 percent decline.
SBI has forecast (-) 40 percent decline in first quarter which, assuming full recovery in the latter three quarters, comes to (-) 10 percent decline on annual basis.
Global management consultancy Arthur D. Little has forecast (-) 11 percent decline.
I think all these are underestimates.

Underlying Indicators

The GST collections were
February 2020: Rs 105000 crore
March 2020: Rs 66000 crore
April 2020: Rs 30000 crore
May 2020: Rs 60000 crore (Expected)
It appears that the trend is continuing in June.
The numbers of e-way bills generated in May were 2.54 crore that led to GST collection of Rs 60000 crores.
The numbers of e-way bills generated between 1-10 June were 87 lakh.
On pro-rata basis, the number of e-way bills for whole month of June may be 2.61 crore numbers and GST collections may be Rs 62000 crores.
That is still 41% down from the “normal” of Rs 105000 crore in February 2020.
Let us take a positive view and assume that the economy bounces back half-way to “normal” in July and 100 percent normal in August to March.
The month-wise decline accordingly would be (-) 71, (-) 43, (-) 41 and (-) 20 percent in April, May, June and July 2020; or (-) 14.6 percent on annual basis.
The trend in GST collections are, I think, a good indicator of the trend in GDP.
Hence we may expect a decline in GDP of (–) 14.6 percent in 2020-21.
As per information available on the website of Central Electricity Authority, the electricity generation was (–) 30 percent of programmed generation in April 2020 and (–) 23 percent in May.
Let us assume (–) 15 percent in June and (–) 10 percent in July.
The annual decline would then be 6.5 percent.
Now, a 30 percent decline in electricity generation in April led to a 71 percent decline in GST and GDP.
Thus, a 6.5 percent decline in electricity generation may lead to a decline of (–) 15.4 percent on annual basis.

Urban Workers

As per NSSO, there were 13.7 crore urban workers in the country back in 2012.
The numbers of urban workers would be 14.8 crore in 2020.
Let us assume about one crore return to their hometowns. They would constitute about 6.7 percent of the urban work force.
Many industries in the host states may slow down because lack of workers.
Reduction of 10% in urban GDP due to unavailability of workers.
The urban areas contribute 82% of our GDP.
A 10% reduction in urban GDP will lead to a reduction of 8.2% in our national GDP.
Therefore, a decline in GDP of (–) 14.6, (-) 15.4 and (-) 8.2 percent is likely to take place in 2020-21 on the basis of GST, electricity generation and migration of workers.
The average of these three figures suggests a decline in GDP of (–) 12.7 percent.
My estimate is that we will see a decline of about (–) 15 percent as things stand today.
The decline will be steeper if we get a second wave of Covid infections.
We will be further hard pressed because of the seeping tension on our borders with China, rise of protectionism in the industrial countries and reduction of remittances from expatriates.
The Government is unfortunately engaged in business-as-usual.
It is borrowing to meet its expenditures-as-usual and to provide a stimulus package on the assumption that revenues will bounce back up and enable it to service the interest burden on this increased debt.
That is not happening.
The economy will sink further as the receipts from GST decline and interest burden on the increased borrowings increase.
Our economy is facing structural problems that have led to the decline in growth rate from 2017 to 2020.
Covid has only brought these to the fore.
The Government is assuming the (-) 5 percent decline in GDP predicted by a number of rating agencies; continuing to borrow and moving to push the economy deeper into the pit.
An alternative would be plan for a (-)15 percent decline in GDP, take people into confidence and impose a hefty import duty on fuel oil.
That will impose this burden mainly on those who travel more or those who buy goods transported from other states.
The common man will be spared.
The import duties will provide the much needed revenues and the Government would not have to borrow and pay interest thereon.
That will bring some cheer to the economy.