New Delhi: The Financial Health of the country is a matter which is of utmost importance to all citizens of the country as it impacts all sections and classes of society. There are various factors which affect the financial health of the country. This report studies a few of these factors and how they have impacted the financial health of the country in the last three financial years, 2018-19, 2019-20 and 2020-21.
The GDP (Gross Domestic Product) of the country has fluctuated through the past three years with the Quarter-on-Quarter growth rate fluctuating between 0.05% in the second quarter of financial year 2019-20 and a whopping 24% in the second quarter of financial year 2020-21 However there have also been quarters when there have also been reductions even upto 28.52% in the second quarter of financial year 2020-21. The dip is because of the economic shock in India due to the lockdown during the first wave of the deadly CoronaVirus. It was marked by an economic decline including a slowdown in industrial activity and trade. However, there was a growth of 24% in the second quarter of the year suggesting a rebound in the economic activities.
The Public Debt of the country, however, has increased over the three years with it being at 48.87% of the GDP in 2018-19, 49.45% of the GDP in 2019-20 and 62.62% of the GDP in 2020-21. An increase in public debt helps to stimulate aggregate demand and output, among others, via the employment generation and productive investment. However, given the fiscal deficits have been utilised more for meeting revenue expenditure obligations rather than into productive investments, such increases in the long run tends to be negative. It is beginning to harm the economy as it has started affecting capital stock formation and economic growth via heightened long-term interest rates, higher distortionary tax rates, inflation, and a general constraint on countercyclical fiscal policies, which has led to an increased volatility and lower growth rates.
The Credit-Deposit Ratio of the country has increased progressively over the past three years having values of 65.47%, 66.40% and 72.5% in 2018-19, 2019-20 and 2020-21 respectively. The increasing trend suggests that the demand for credit in the country is growing at a higher rate than the savings. This is not good for the economy as the high credit-deposit ratio signifies liquidity constraints for the banks in the long run leading to higher interest rates.
The Gross Non-Performing Assets (NPAs) have decreased from 11.60% in the first half of 2018-19 to 7.50% in the second half of 2020-21. The improvements have been contributed by the new debt resolution law passed by the government towards settling the outstanding loans. However, the GNPA is likely to shoot up owing to the Covid related stress on borrowers post the loan moratorium. The GNPA going down is a good development as the banks then have more money to lend than to provide for in their balance sheet.
The fiscal deficit rates have spiked reaching 9.50% in financial year 2020-21 from 3.39% in financial year 2018-19 and 4.59% in financial year 2019-20. If the fiscal deficit is high, which in this case it is, it is detrimental to the financial health of the country as it leads to crowding out of private investment and inflation owing to higher volume of money in circulation with the supply of goods being almost fixed in the short term. The primary deficit of the country had dipped from 1.10% in 2018-19 to 0.90% in 2019-20 but has again risen to 1.90% in the financial year 2020-21. This is a good sign for the economy as a rising primary deficit indicates that the government is spending less on interest payments and more on productive and consumption expenditure.
The inflation rate in the country was at 4.76% in 2018-19 but went up to 6.20% in 2019-20 which was concerning as this caused the strength of the currency to fall and caused the buying power of the people to reduce. However, unlike what was expected, the inflation rate fell in 2020-21 to 4.89% which is good for the economy suggesting that the buying power as well as the strength of the currency is getting support from it and it also allows the Reserve Bank of India (RBI) to continue to have an expansionary monetary policy. It may be noted that the RBI monetary policy is based on inflation targeting in the range of 2% to 6%.
During the Covid-19 pandemic in the financial year 2020-21, the government budget expenditure in the health sector grew to INR 692.34 billion from INR 664.66 billion in financial year 2019-20 suggesting that a much larger amount was spent in the last year to address the challenges and provide stimulus owing to the Covid crisis. One more aspect that was dealt a blow during the pandemic was the unemployment of the people. The unemployment rate has gone up significantly and the labour force participation rate (LFPR) has gone down. Some anecdotal evidence suggests that the LFPR drop is owing to several women dropping out of the workforce due to the work from home conditions prevailing post Covid outbreak.
In conclusion, the financial health of the country is one aspect which is of grave importance and it must be noted that the government in power always does its best to balance the good fiscal management and the welfare of the citizens. The economic condition of the country in the past three years has improved in some aspects while some of the parameters have worsened owing to the Covid challenge. In balance, we can conclude that given the challenges facing the economy, the Government of India has considerably done a good job keeping things under control even though there is a view that there could have been more fiscal stimulus for faster post Covid recovery.