Prof. Arun Kumar
What will Indian Economy’s rate of growth be in 2020-21 given the present lockdown? Evidence of a stalled economy are all around –unemployed workers, closed shops, factories and offices, empty roads, etc. Only essential goods are being produced and that too with some difficulty due to supply chain bottlenecks. Agriculture can function but there too, operations have been hampered by shortage of labour and difficulty in moving produce to the markets. There are reports of vegetables and fruits rotting in the fields. At a conservative estimate, the economy cannot be producing even 25% of the output it was producing in February 2020. After the relaxation of the lockdown on 14thApril, production may have increased to 30%. Starting from this low base, what will the rate of growth be in 2020-21?
Growth Estimates of Various Agencies
Various agencies have given their estimates but, how realistic are they? The correct number is crucial to plan ahead to tackle the crisis and revise the budgets (of the Center and the State Governments).
The IMF had, in January 2020, estimated that the growth rate would be 5.8%. Now it has scaled it down to 1.9%. For the world as a whole, it has predicted that the economy will shrink by 3%. China has reported a shrinkage of its GDP by 6.8% in the first quarter of 2020, but IMF projects that it will grow by 1.2% in the full year. So, in spite of a dismal global scenario, India would be a star performer.
But is this feasible if during the two months of lockdown and revival after that, the economy has contracted by 70%? To get an average growth of 1.9%, the economy would have to dramatically rebound in June to the pre-pandemic level and start galloping at 16.4% over last year. An unheard of rate, especially when the economy had slowed down to less than 5% by January 2020.
Fitch Ratings projected a growth rate of 2% on April 3rd, 1.8% on April 20th and 0.8% on the 23rd. Its current calculations are based on growth of 4.4% in January-March quarter, minus 0.2 per cent in April-June, minus 0.1% in July-September, and 1.4% for October-December period. But, if in April the economy is at -70% at best, to achieve -0.2% in April-June quarter, output in May and June would have to grow an incredulous 34.7% over last year’s levels in those months.
The Confederation of Indian Industry (CII) has given a range of 1.5% to -0.9% growth for the Indian economy in FY 2020-21. To get to -0.9% figure from where the economy is in April, and assuming an immediate rebound in June, an average growth rate of 12.8% would be required in the next 10 months.
In brief, the growth estimates by IMF, Fitch Ratings and CII require that starting June, the economy takes an unheard of leap. So, what is a realistic scenario given the present collapse of the Indian economy?
Likely Growth Scenario
The RBI had recently argued that it is difficult to predict the growth rate given the uncertainty about the future course of COVID-19 and its impact on the economy. This is correct since one has little idea about the course of the epidemic in the coming months. If we are lucky, heat will slow down the spread of the disease. But, epidemiologists warn of a second round flare up of the disease as is now being experienced in some countries, as lockdown restrictions are lifted. It is also true that the problem cannot be solved in one country alone so it will persist till it is eradicated globally. Finally, a vaccine or a medicine would help but when will one be available and how effective would it be is uncertain.
Measuring the growth of the economy is problematic when there is a demand/supply shock. This is especially so for India where the data base is weak and data becomes available only with a considerable time lag. So, proxies have to be used but these need to be changed when there is a shock. In the quarterly GDP estimates, data is only available for the corporate sector, agriculture and a few other items. But, with the economy in lockdown and very few companies functioning, the limited corporate sector data available will not be adequately representative. Similarly, for agriculture, with perishables getting spoilt and the marketing problem faced by the farmers, the usual method will not reflect the correct estimate of its GDP contribution. Finally, the unorganized sector is mostly shut, it cannot be proxied by corporate sector data.
In brief, a new methodology is required to estimate GDP when the economy has suffered a huge shock.
V or U Shaped Recovery?
For estimating GDP for the full year, a key assumption has to be the likely course of the economy post lockdown. Would the recovery be `V-shaped’ or `U-shaped’? In the former case the economy should bounce back as soon as the lockdown is lifted, while in the latter case, the economy will recover gradually over time.
Various factors are militating against an immediate recovery after the lockdown is lifted. For instance, many skilled workers have migrated back to their villages and are unlikely to return soon, if at all. Due to adversity, consumer confidence has dropped. Further, business confidence and investments have plummeted. All this leads to a shortage of demand. Further, there will be logistical difficulties in restoring supply chains. Trade and transportation need to be restored and that would not be easy due to the fear of the disease.
Government’s fiscal space to provide a stimulus to the economy is limited. First, its fiscal deficit was already high. Second, the sharp decline in production would lead to an even sharper fall in government’s revenue. Third, there will be large expenditures related to the medical emergency and the need to support large numbers of poor who have lost livelihoods. Fourth, expenditures will have to be incurred to prevent business failures. Finally, of a smaller GDP, the Fiscal Deficit per cent would be higher and will be unsustainable.
In brief, given the fiscal constraints, the government needs to anticipate evolving problems and take advance actions. Like, cutting back on inessential expenditures and focusing all efforts on preventing the economy and society from collapsing. For all this, a prerequisite is the estimation of the correct rate of growth of the economy.
Prof. Arun Kumar is the Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, Delhi. He was also formerly Professor of Economics, Jawaharlal Nehru University and authored the book – ‘Indian Economy since Independence: Persisting Colonial Disruption’.
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Categories: Corporate Law