A staggering contraction
The central government must announce a fiscal stimulus and resolve the GST dispute
According to data released by the National Statistical Office on Monday, India’s GDP contracted by a staggering 23.9% in the April-June quarter. The contraction is larger than the 19.2% figure projected by a Bloomberg poll of economists. And it shows that the nation-wide lockdown, which was in place in April and May, has taken a heavy toll on economic activity. An examination of Gross Value Added (GVA) figures, which is GDP minus taxes, shows that the non-farm economy has suffered a contraction, including public administration, defence and other services. In an unusual development, the GDP growth numbers are lower than GVA, which means that taxes have also contracted. Experts believe that the first estimates could see further downward revision as informal sector numbers become available at a later stage.
Krishnamurthy Subramanian, the Chief Economic Adviser (CEA) to the ministry of finance, while reacting to the numbers, said that they reflected the exogenous economic shock of the pandemic. He claimed that the economy was already in the process of achieving a V-shaped recovery. High frequency indicators for August do suggest that things are improving. However, it is important to differentiate between a sequential and annual recovery. The real question is not whether the subsequent GDP numbers show a smaller contraction than 23.9%. What matters is a return to pre-pandemic income levels. Most experts believe that this is not likely in the next few quarters, maybe even years.
The government must adopt a two-pronged approach immediately. One, as this newspaper has argued, it must announce a second fiscal stimulus — and soon — for that is the only way to spur demand. This deployment of additional public resources must be done smartly. For instance, the government’s own survey suggests that at least three-fourths of micro, small and medium enterprises were using less than half of their productive capacity as on August 1. Can the stimulus be geared towards boosting this sector? Or would a direct cash transfer to citizens work better? Two, as Covid-19 cases continue to increase, even the ongoing sequential recovery may get jeopardised. India’s battle against Covid-19 is critically dependent on how state governments handle the challenge. They need resources to perform on this front. This is why it is necessary that the Centre resolves the ongoing Goods and Service Tax compensation payment dispute with the states in an amicable manner. Till India gets its postpandemic economy right, its developmental and global ambitions will remain unmet.