The government’s first advance estimate of growth for 2020-21 has pegged the Indian economy to shrink by 7.7 per cent. This will make the ongoing fiscal the first official recession in 40 years and only the third, since Independence. While the Finance Ministry’s estimate is in sync with the Reserve Bank of India’s projection of a negative growth of 7.5 per cent, it is sharply less than the estimate by global institutions. The World Bank expects India’s GDP to shrink by 9.6 per cent, while the IMF has pegged the shrinkage at 10.3 per cent and credit rating agency Moody’s has estimated the fall at 10.6 per cent.
Despite this wide divergence, the Finance Ministry is optimistic about the speed of the recovery. “The movement of various high frequency indicators in recent months, points towards broad based nature of resurgence of economic activity. The relatively more manageable pandemic situation in the country as compared to advanced nations has further added momentum to the economic recovery,” it has stated.
The ministry has pointed to the support on the demand side, by an estimated increase in Government Consumption Expenditure by 5.8 per cent. Government spending on public administration was pushed by Covid relief work, as well as a sharp uptick in defence expenditure spurred by India’s border face-off with China. On the supply side, agriculture is estimated to register a positive growth of 3.4 per cent against 4.0 per cent as per the provisional estimate of 2019-20.
However, it would be too early to conclude that India is out of the woods on the growth front. It must be noted that the first advance estimates tend to be off the mark more often than not. They have accurately matched the final number only thrice in the past 13 years. Further, this year’s estimates are based on limited data, with data available for only the first two quarters, instead of the usual three quarters. With extensions given to businesses for filing returns due to the pandemic, corporate data is missing in large part. Using volatile, high-frequency indicators to extrapolate a recovery at this early stage is premature.
More worryingly, it must be noted that the Budget for the ongoing financial year has already been rendered virtually irrelevant by the pandemic. The numbers presented on February 1, 2020, were based on assumptions about growth and inflation tax collections, which have all been rendered null and void by the catastrophic impact of the pandemic-induced lockdowns.
The Government needs to remember that key economic data drive strategy and decision-making in both the Government and private sectors and as such, should not be used for headline management. It would be nice if the Finance Ministry’s estimates turn out to be correct and India indeed manages a ‘V-shaped’ recovery; but it would be extremely risky to base one’s medium-term economic planning on an optimistic fill-in-the-blanks exercise.