Government should loosen purse strings for swift recovery: Brickwork Ratings

New Delhi: With coronavirus lockdown further precipitating downturn in the economy witnessed even before the COVID-19 crisis, swift recovery requires the government to loosen its purse strings as only public spending can trigger economic revival, Brickwork Ratings said. In a report on 'COVID-19 and Growth Challenges', it said a sharp downturn was witnessed in the economy even before the pandemic, and the coronavirus battle had to be fought by a wounded economy.
"This also implies that policy interventions during the year were not strong enough to arrest the slowdown," it said, adding a steadily declining investment rate has been a major factor in causing deceleration prior to the coronavirus crisis.

The balance sheets of the corporate sector, banks, as well as the government, have been under severe stress, and the policy focus on reducing policy rates has done little to lift sentiments.

Despite a lower cost of borrowing, lenders were unwilling to lend for the fear of reprisal, and borrowers were unwilling to borrow as there is uncertainty all round.

The lockdown was the most severe in March, and although it was relaxed marginally May onwards, economic activity hubs continue to be closed for business.

"With the emergence of the pandemic, 'the chickens have come home to roost', and swift action is imperative," it said. "The pandemic forced the enforcement of a draconian lockdown with severe adverse effects on the economy."

With the major hubs of economic activity still closed for businesses, it is not clear how long and how severe the impact will be, BWR said, predicting a 5.5 per cent contraction in GDP in 2020-21 fiscal.

"The only way to emerge from the situation is to inject a massive stimulus, but weak fiscal strength does not permit it," it said. "There was considerable enthusiasm when the Prime Minister spoke about giving a stimulus of more than Rs 20 lakh crore. However, this vanished quickly after the details of this 'stimulus' were unravelled by the finance minister."

Additional spending in the stimulus was just around 1 per cent of the GDP.

"Swift recovery requires the government to loosen its purse strings because it is public spending that can trigger economic revival," the rating agency said.

Stating that growth estimates released by the Ministry of Statistics and Programme Implementation (MOSPI) brings into focus some stark and worrisome realities, the rating agency said GDP growth at 4.2 per cent in 2019-20 was the lowest in 11 years.

"There was sharp and steady deceleration in growth from 5.2 per cent in the first quarter (Q1) to 3.1 per cent in the fourth quarter (Q4)," it said. "The economy showed sharp deceleration in growth even before the lockdown was announced in the context of COVID-19, and it only exacerbated this decline."

Deceleration in growth, it said, was witnessed in all sectors except agriculture, mining and quarrying, and public administration and defence.

Substantial revisions in the sectoral and aggregate growth estimates for the previous quarters add some mystery to the numbers, it said, adding both provisional as well as the quarterly estimates of the GDP will undergo further revision in the next round as the lockdown in the last week of March would have impacted data collection even more.