As India’s GDP slides, worse is still to come for the economy

The latest data released by the National Statistical Office (NSO) on Monday (August 31) has confirmed what was obvious to most Indians — that the Indian economy is in the throes of its deepest ever recession.

For the generation of Indians born after economic liberalisation commenced with the second coming of Indira Gandhi in 1980, this is their first encounter with a full blown recession. A decline was of course expected, especially because of the unprecedented and historic nature of the impact when demand and supply were both hit, simultaneously, because of the Civid-19 pandemic.

The first quarter of the current financial year was one in which economic activity was virtually at a standstill because of the countrywide lockdown, from which India is only now slowly and hesitantly exiting.

The news that India’s Gross Domestic Product — a measure of national income — declined by almost 24 per cent during the April-June 2020 quarter compared to the same quarter of 2019 — implies that almost a quarter of India’s national income basically evaporated.

For several reasons, however, the news, bad as it may be, may, in fact, be just the beginning of a long season of misery. As movie buffs like to say, “This was just the trailer, wait till you see the real thing.”

For one, these estimates are like the first approximations of a complicated picture.

Most of the estimates are based on an evaluation on the performance of listed companies — a thin slice of what is referred to as the organised sector. Obviously, this misses out a large part of the economic activity carried out in the unorganised sector and in the wider economy.

The latest estimates are based on a projection of data from a limited database and a set of assumptions about the wider economy. Tenuous in the best of times, such assumptions are sure to be found seriously wanting in an extraordinary and unprecedented situation posed by the pandemic.

For instance, Soumya Kanti Ghosh, State Bank of India’s Chief Economist, has pointed out that the normal method of estimating manufacturing output in the informal sector by using the Index of Industrial production as some kind of a base, would be utterly unreliable in a Covid-haunted world.

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The nationwide collapse of activity as well the cataclysmic and unprecedented reverse migration of the workforce after the commencement of lockdown would have disrupted activity to a point where normal methods of extrapolating data would be utterly useless, Ghosh said in a recent report.

Incidentally, Ghosh observed that the average slowdown in 60 economies around the world was just 12.2 per cent, less than half the extent of collapse of the Indian economy.

Thus, it is obvious that these GDP estimates will be “revised” in a few months, just as they are every year. So, Indians need to brace themselves for a much worse decline than what was fed to them yesterday.

This is especially because, like in the case of demonetisation, which hit unorganised sector activities much harder than those in the organised sector, the lockdown was particularly harsh on smaller businesses and small scale economic activity.

A second feature of the latest data is the staggering nature of the slump. The extent of collapse has been all-round. The sectoral composition of economic performance in the first quarter reveal why a recovery is nowhere in sight.

First, a closer look at the data shows that the performance of agricultural or the wider rural economy has not quite been the “silver lining” that pundits have been mouthing for some time now. It is true that agricultural output has been the only area that registered positive growth — 3.4 per cent.

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But, note that the growth of the nominal portion of GDP (that is, not taking into account inflation) emanating from all agricultural and related activity was just 5.7 per cent, compared to almost 14 per cent in the previous quarter. This is also borne by the fact that activities like dairying collapsed catastrophically after the lockdown, and which was reflected in the collapse of milk prices across the country.

Secondly, in terms of value of output, sectors like hotels, construction and manufacturing have performed particularly badly. These are also sectors that employ a large proportion of the workforce, which has implications for demand in the economy (via wages).

Not surprisingly output from hoteling activity has collapsed by a whopping 47 per cent, that in construction has fallen precipitously by half, and that in manufacturing has fallen by almost 40 per cent during the first quarter of the year. Further, the output generated by trading activity — another manpower-intensive sector — declined by a whopping 47 per cent.

One additional point remains to be said about the data and the quarter: if output in the first quarter, which is generally the lowest in a normal year, has fallen so badly, what can one expect in the remaining portion of the year?

The third feature of unprecedented contraction of the Indian economy is the dimunition of government expenditure on defence, public administration and other services, which shrank by more than 10 per cent.

Although government consumption expenditure increased by 16.4 per cent during the quarter, it was more than offset by the 26.7 per cent collapse of private consumption (which is a far bigger entity) demand. Not surprisingly, private investment demand too collapsed, by more than 16 per cent, reflecting a gloomy expectation of the future by those who invest in economic activity.

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The failure of the Narendra Modi government to fill this void, by meaningful demand-side measures, is thus reflected in the economy’s latest report card.

India seems to have been served just desserts for doggedly standing out as a lone ranger in a world where governments of different political persuasions across the world have initiated a significant economic stimulus programme whose core has been government spending to boost economic activity.

The Chief Economic Adviser to the Finance Ministry, Krishnamurthy Subramanian, said the data has been on expected lines, that the nationwide lockdown was bound to have hit economic output adversely.

He expects the ongoing “unlocking” to result in a “V-shaped recovery,” implying a quick rebound of economic activity and output. That is by no means certain. And, the data does not present such a cheerfully optimistic scenario.

The runaway boom in the Indian stock markets, even as the wider economy remains mired in India’s deepest-ever recession, appears to be an eerie reminder of a dystopian world.

It is just possible that a significant part of the liquidity sloshing around as a result of the Reserve Bank of India’s misplaced faith in liquidity in the aftermath of Covid, has leaked to the stock markets instead of being harnessed productively.

Meanwhile, as banks totter under the weight of assets that have turned dud as a result of the pandemic, their ability to finance even an anaemic recovery is seriously compromised.

As India’s Covid caseload mounts — and it is not even clear whether India has reached a peak level of infection — the Indian economy’s future looks grimmer than ever.