India’s GDP fall

The recent government estimates released show2 that India’s GDP contracted by 7.3% in 2020-21. While the pandemic has hit growth in countries across the world, several trends over the last decade show that the Indian economy was already worsening in the years before Covid-19.

• To understand this, fall in perspective, remember that between the early 1990s until the pandemic hit the country, India grew at an average of around 7% every year.
• One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.
• The other way would be to look at this contraction in the context of what has been happening to the Indian economy over the last decade.

Historical GDP data

• Between the early 1990s until the pandemic hit the country, India grew at an average of around 7% every year.
• After the decline in the wake of the Global Financial Crisis, the Indian economy started its recovery in 2013.
• Back then, quarterly GDP growth fell from 10.3% in March 2011 to 4.9% in June 2012. However, the economy started recovering after 2011-12.
• Annual GDP growth fell from 8.5% in 2010-11 to 5.2% in 2011-12. This contraction was followed by a sharp recovery until 2016-17.
• This has not been the case this time and GDP growth has been falling continuously since 2017-18.

Reason for downfall in GDP between FY18-FY20

Private consumption and investment had collapsed even before the pandemic

• Fall in nominal growth was bigger

1. Nominal GDP growth in 2019-20 fell to just 7.2%, the lowest since 1975-76. The 2019-20 Union Budget assumed a 12% nominal growth. Nominal GDP is crucial for revenue collections, as taxes are a fraction of nominal incomes. The sharp fall in nominal growth was a big reason for a huge shortfall in tax collections in 2019-20. According to data from the Controller General of Accounts, which works under the ministry of finance, gross tax revenue collections were just 81.6% of the budget estimates in 2019-20, the lowest since 2000-01.
2. As the ripples of demonetisation and a poorly designed and hastily implemented Goods and Services Tax (GST) spread through an economy that was already struggling with massive bad loans in the banking system, the GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.

• Both current and future drivers of growth collapsed

1. Consumption demand is the biggest driver of economic growth in India. In 2019-20, Private Final Consumption Expenditure (PFCE) had a share of 57% in India’s GDP. PFCE growth collapsed to 2.7% in the March 2020 quarter, the lowest since June 2012.
2. Given the strengthening headwinds to consumption demand, firms started shelving investment plans. This can be seen in Gross Fixed Capital Formation (GFCF) contracting at an increasing rate for three consecutive quarters ending March 2020. A collapse in investment demand has adverse implications for future growth potential of the economy. It was only government expenditure which was acting as a counter-cyclical force to some extent.

Why covid was the last nail in the coffin?

• Rail, road movement
  • Over 30% of all industrial goods in India are transported via trains. So, railway freight volumes become an important indicator of economic activity in the country.
  • With many parts of India, including metro cities like Mumbai and Delhi, under state government-imposed lockdowns, daily average railway freight volumes in India have dropped by 11% month-on-month in April, according to Indian Railways data.
  • The fall in railway freight volume could also be an indicator of falling demand in parts of the country.
• Curfews curb mobility
  • With partial and full curfews imposed in certain Indian cities, the number of people moving out of their homes has dropped.
  • As per Apple’s driving index, which is compiled monthly on the basis of the number of requests made on Apple Maps for directions, Indians across major cities are commuting far lesser in April than in the previous three months.
• Unemployment on rise
  • One of the biggest impacts of the lockdowns in 2020 was a sharp rise in unemployment, especially in the unorganised sectors. In April 2020, unemployment in India spiked to 23%.
  • However, as the country reopened, the job market started recovering and by February 2020, the unemployment rate fell to 6.9%.
• Weak business activity
  • All these headwinds reflected in Nomura’s India Business Resumption Index, which shows that the business activity in India has taken a beating. The index takes into account parameters such as Google mobility indices, Apple’s driving mobility data, power demand in India, and the labour force participation rate.
  • On April 11, the index fell to 90.4 from 99.3 in the first week of February.

What needs to be done?

• Universalise PDS for a year: The first fiscal intervention should be in making food available to as many as possible. That can free substantial amounts of purchasing power for other kind of consumptions. With inequalities remaining large within the structure of Indian economy, this pandemic can be an opportunity for redistributive measures. Universalising the public distribution system (PDS) would be a good starting point.
• Expanding employment guarantee to urban areas: Given the sharp drop in GDP, opportunities in urban areas are also expected to shrink. It is of paramount importance that circular migrants are absorbed into the urban employment set. But the absorption may not be an easy task when jobs are generally disappearing. Expansion of employment guarantee scheme in urban area is thus necessary to stabilise the economy.
• Global Shift: Global trends such as digitization and automation, shifting supply chains, urbanization, rising incomes and demographic shifts, and a greater focus on sustainability, health, and safety can become the hallmarks of the post pandemic economy.
• Public investment in physical and social infrastructure: Public investment – at least for some time – is necessary to crowd in private investment. India has a lack of infrastructure facilities that has been often cited as one of the major reasons behind the failure of industry, particularly manufacturing, to take off and reach a desired level. Building infrastructure creates immediate employment and purchasing power, infusing demand into the system.

What RBI Annual Report has to say?

• For a self-sustaining GDP growth trajectory post-COVID-19, a durable revival in private consumption and investment demand together would be critical as they account for around 85 per cent of GDP.
• In view of the limited share of government consumption demand in GDP (at around 13 percent in 2020-21), a rebound in private demand is essential to sustain the recovery.
• Typically, post-crisis recoveries have been led more by consumption than investment; however, investment-led recoveries can be more sustainable and can also lift consumption in parts by better job creation.
• In line with the mathematical models built around epidemiological regularities predicting that India’s second wave may broadly peak by mid-May 2021, the daily new infections have started to drop recently, though the incidence and replication factor still remain high for comfort.
• Under this outcome, the macro-economic costs of this wave can be limited to Q1:2021-22 with possible spill over into July.

Conclusion

To sum up, the year gone by has left a scar on the economy. In the midst of the second wave as 2021-22 commences, pervasive despair is being lifted by cautious optimism built up by vaccination drives. Intense national efforts to beat back the virus are coalescing at least to some synchronicity across the world. Countries are stepping away from vaccine nationalism as the world adapts by learning to survive. A collective global effort to fight the pandemic will surely bring better results than individual countries fighting on their own. The G20 goal of strong, sustainable and inclusive growth may yet be in sight and within reach.