An ‘act of God’? Or a man-made economic disaster forewarned by close observers of Indian economy – as former finance minister P Chidambaram observed – in absence of a suitable government response to control the damage? Whatever it is, India has suffered yet another blow. As if the rising cases of Covid-19 were not enough, now the pandemic has sent the economy crashing, with the GDP plunging a record 23.9 per cent in the first quarter of the current financial year. In rupee terms, according to research firm Credit Suisse, the record contraction amounts to Rs 20 lakh crore loss in three months.
As the lockdown brought all economic activities, except agriculture, to a standstill, India’s GDP growth was expected to fall. But the extent of contraction has surprised many, including economists. The broad consensus was that the decline would not exceed 20 per cent. As it turned out, GDP has contracted by almost 24 per cent. The waterfall like slide is also the sharpest economic contraction among the G20 economies, and the worst contraction recorded by the Indian economy in four decades.
When factories were shuttered down abruptly, road and infrastructure projects came to a standstill, real estate construction halted, travel and transport stopped, airlines grounded planes, e-commerce closed shop and malls and cinema halls shut abruptly for a long time, the economy was bound to shrink. This is captured in the national income data released by the Central Statistical Office (CSO) on August 31.
The collapse in total value of goods and services produced in Q1 is because almost all major indicators of growth in the economy – from manufacturing to real estate, mining to trade, railways to ports, airports to hospitality, production of cement to consumption of steel and financial services – have shown deep contraction. Had it not been for increased government expenditure and a drop in imports, the GDP figure would have looked even worse. What is disconcerting is that the numbers are likely to be revised, as indicated by the CSO, because the quality of data is sub-optimal.
Since 1979, India has never recorded a drop in real GDP. Between 1991-92 and 2019-20, India’s average GDP growth rate has been 6.8 per cent; the lowest growth rate was 1.1 per cent in 1991-92, the starting year of economic liberalisation and the highest was in 2010-11, at 10.3 per cent. During this period, the GDP growth rate had fallen below 5 per cent thrice: FY-97 at 4 per cent, 3.8 percent in FY-02 and 3.9 per cent in FY-08.
Since Independence, there have been four episodes of negative growth – in the late 1950s, 1965, 1972 and 1979, when India recorded the highest contraction in GDP of 5.23 per cent. India has never had a recession in the last 40 years. Covid-19 could push India into a deep recession; typically, recession is defined as contraction or negative growth in two consecutive quarters. The contraction of economy is expected to run through the second quarter as also the second half of the fiscal year, since the rapid spread of the pandemic continues to weigh in on demand, hindering a pick-up in economic activity.
Though the coronavirus-related restrictions have been gradually lifted, the virus is spreading faster in India than anywhere else in the world: daily cases have exceeded those of the US and Brazil for more than two weeks. India currently has more than 42 lakh cumulative cases and over 71,000 deaths.
Economists say the rapid increase in Covid-19 cases amid stretched public finances and rising inflation means economic recovery may not take place soon. Some say the second quarter could see a year-on-year contraction of nearly 15 per cent, while the shrinkage for FY-21 could be anywhere between 7 to 10 per cent. Some economists like Pronab Sen are of the view that FY-21 growth could shrink between 10 to 15 per cent. This makes India’s $5 trillion economy by 2024 an impossible dream. In any case, it was a very difficult goal to achieve, because the economy had slowed down considerably from 8 per cent in 2015 to around 4 per cent in 2020. This was before the pandemic caused the huge decline in growth rate.
As economic contraction was anticipated, economists had urged the government to take preventive and preemptive measures to cushion the fall with suitable fiscal and welfare measures. But the government did little to control the damage. After the announcement of Rs 1.76 lakh crore mini-economic package on March 26, the government was under pressure to announce a second economic package to revive the economy, by way of cash transfer to the poor to stimulate demand.
In May, Prime Minister Narendra Modi announced a Rs 20 lakh crore stimulus package, which included credit guarantees on bank loans and free foodgrain to the poor. But when the veil on the mega package was lifted, it turned out to be a government-mandated loan mela and its actual fiscal impact was estimated at only around 1.5 lakh crore or less than 1 per cent of the GDP. Many economists had said that much of the second economic package was provided for in the budget and very little included new spending. Obviously, it was not expected to spur consumer demand and manufacturing activity. A weak fiscal support will likely delay the recovery.
An economic contraction means a decline in national output as measured by GDP. It includes a drop in real personal income, industrial production and retail sales; it also increases unemployment rates. The Centre for Monitoring Indian Economy data suggests that the number of salaried people losing their jobs amid the pandemic has surged to 18.9 million since April. The data also showed that around 6.8 million daily wage earners lost their jobs during this period.
Since the lockdown was announced, several companies across the sectors have taken to job cuts, along with salary reductions and leave without pay. The impact of the pandemic-induced lockdown on the informal sector, which employs almost 80 per cent of India’s workforce, has been immense and it is yet to be captured fully in GDP data. This means the human cost of the lockdown and pandemic has been enormous, particularly on the lower strata of society.
This brings us to the important question: How long will the pandemic impact last? And when will the economy return to its pre-pandemic levels? Based on core sector output, chief economic adviser to the government, Krishnamurthy Subramanian is expecting a V-shaped recovery. In its monthly economic outlook for August released on Friday, the finance ministry observed that the worst is over for the economy and it is on a path of V-shaped recovery.
A V-shaped recovery happens when the economy rebounds as quickly as it had fallen. This needs the government’s intervention by way of fiscal stimulus and welfare measures to push up demand, instead of hiding behind the RBI-led credit schemes. Not many economists are predicting a V-shaped recovery, given the pandemic’s pervasive spread and the lockdown’s severe impact on the broader economy. Therefore, the first quarter GDP contraction is expected to have a lasting impact on lives and economy.
The author is an independent senior journalist