A world-beating GDP cannot mask the pain of the pandemic
The economy was in trouble even before the second wave, and now fresh gains for India Inc are coming at the expense of households and tiny enterprises
Before the ink could dry on India’s quarterly gross domestic product statistics, officials have been quick to parade last quarter’s 20 per cent growth as vindication of their prediction of “imminent V-shaped recovery”. How sensible is that claim?
The April-june period was when the pandemic overwhelmed oxygen supplies and hospital beds, villagers floated bodies in rivers, families sold their assets to save their loved ones, and an estimated 2.5 million to 2.8 million Indians died because of Covid-19, according to independent researchers.
Statistical artifacts may serve to deny the pain. But GDP expanded 20 per cent from a year earlier, and is set to beat expansion in any major economy this year, only because it had shrunk 24 per cent in the same quarter of 2020. Cheery spin can’t hide the mass suffering across India. Nor should it detract from the long road to recovery ahead.
The number policy makers should focus on is minus 20 per cent, for that’s the shortfall in production from India’s precoronavirus growth path.
To see this, consider the ~36 trillion ($500 billion) of output in the June quarter of 2019. Index it to 100. Had that number continued to grow at the near-7 per cent rate seen during the April-june period of the previous eight years, it would have crossed 114 by now. Instead, India is left with ~32 trillion of real production, which corresponds to roughly 91 on the index. That’s a fifth of potential GDP lost in the first quarter of the fiscal year. Assuming that the country gets lucky and avoids a deadly third wave, some of the loss might get made up in the remaining nine months. For that, though, India needs robust pent-up demand. Where will it come from?
Even after the pandemic subsided, consumer sentiment in July was only half as strong as before the onset of Covid-19 in February 2020. Worse still, the crucial backbone of the middle class, which comprises over 160 million households earning between ~200,000 and ~500,000 a year, saw the lowest improvement, “a mere 1 per cent increase over June”, as Mahesh Vyas at the Center for Monitoring Indian Economy puts it.
Private consumption, which accounts for more than half of India’s economy, is where it was four years ago. Among other sources of demand, investment jumped 55 per cent in real, or inflation-adjusted terms, but it was still 17 per cent lower than during April-june 2019. Exports clocked a strong 39 per cent growth over the same period of 2020, but that was because there was no nationwide lockdown this time around.
India’s growth strategy is mostly about boosting the supply side of the economy. The corporate tax rate was cut even before Covid-19. In addition, firms have been promised $28 billion in production-linked fiscal incentives. The underlying demand conditions, however, are artificially propped up by the central bank. Over $125 billion of excess liquidity in the banking system is keeping markets buoyed on the bet that 5 per cent-plus inflation will be transitory, interest rates will remain low for long, and that foreign capital won’t up and leave because of any abrupt tightening by the Federal Reserve. Yes, there’s an ambitious $1.5 trillion infrastructure plan to reinvigorate demand. But its success is predicated on the government monetising $81 billion of its existing roads, railway, power and other assets to raise resources.
How long can the economy wait for jobs and incomes? Vaccinations have picked up pace, but has some way to go: Only 146 million people in a country of 1.4 billion have been inoculated so far with the required two doses. Policy makers aren’t just downplaying the urgency of short-term fiscal palliatives for households, but they’re also ignoring the damaging consequences for India’s long-term competitiveness.
An economy that performs well below potential for too long will suffer a permanent loss. With technology and tastes changing, it’s safe to write off production that fails to materialise in even three or five years. Most of it will never arrive. Something else will have to replace the lost output and the attendant jobs, and that just can’t be food or grocery delivery. There’s work to be done.