Covid-19: What you need to know today
T he Indian economy declined by almost a fourth in the first quarter of 2020-21 compared to a year ago, and there are fears that when data from smaller companies and the informal sector is factored in, the fall could be much higher.
The coronavirus disease and the lockdown imposed to fight it — there was a near-total lockdown for 68 days, including the entire months of April and May, although some restrictions were relaxed starting mid-April — have clearly roiled the economy. By how much? The loss of 23.9% of GDP, or ₹8.6 lakh crore (in 2011-12 prices; at current prices, the amount is ₹11.1 lakh crore), in these three months. Every Indian has seen a loss of ₹6,466 in this period, although, to be sure, the pandemic hasn’t affected everyone equally.
The general consensus among economists and statisticians is that the contraction will be larger — because proxies have been used to make good the gaps in data collection (the ongoing pandemic made this difficult), and because data on small companies and the informal sector isn’t readily available, although it is anecdotally known that small companies and the informal sector have been hit hard by the pandemic and the lockdown.
The numbers released on Monday show that private consumption is down 27%, which isn’t surprising — some people have lost jobs, others have taken salary cuts, and everyone has become cautious with spending. There is also the beginning of what some financial advisors term precautionary saving — with the prospect of the proverbial rainy day now being all too real. Still worse, investment, one of the pillars on which the economy is built, fell by 47% in the quarter. Among large economies, India’s rate of contraction was the sharpest — by quite a bit. The US, for instance, saw its economy shrink by 9.04% in the same quarter year-on-year (its second, because it follows the calendar year for accounting unlike India).
The consensus among experts, before these numbers were released, was that the Indian economy would shrink by at least
5% in 2020-21. It is now becoming clear that 5% may have been an underestimation. India is two months into its second quarter (JulySeptember), and business activity is yet to return to pre-pandemic levels, although it has improved since May. And while there are positive signs in some high-frequency indicators (those released more frequently than a quarter, such as car sales data), there’s nothing to suggest that India is in the midst of a V-shaped recovery as emphasised by the chief economic adviser.
Indeed, given the current economic context, even the prospect of a U-shaped recovery looks challenging. Unless there is a miraculous turnaround in fortunes, the Indian economy will likely contract in the second and third quarters. And for the year as a whole, it is possible that the Indian economy will contract by much more than 5% in 2020-21. Some experts believe the number could be close to 10%, though there are others that see this as an extreme estimate.
What should the government’s response be?
The simple answer to this would be: spend. The government should spend money to boost aggregate demand, which includes both consumption and investment. The problem is that it has limited headroom. Data released on Monday showed that its fiscal deficit is already at 103% of the 2020-21 estimate. One radical alternative (that people are already beginning to talk of) is debt monetisation. In other words, India could consider monetising at least part of its deficit. At one time, any country even thinking of this would have been censured by the world at large. It is a sign of the times, and the pressing economic challenges facing countries, that Indonesia’s decision to monetise $40 billion of its debt didn’t provoke any strong criticism (it did cause a flutter, though). One of the classical economic arguments against this is that it will boost inflation. Given that the primary economic challenge right now is on the demand-side (supply isn’t a constraint, at least, not yet), the government need not worry about inflation (again, not just yet).
This could also help the federal governments meet its payout commitments to the states, which are at the forefront of the fight against the pandemic and, therefore, need more money.
After all, it will take something special, even unconventional, to deal with an Act of God.