CONTRACTION, AND THEN WHAT?
Whether the pandemic will unleash a radical realignment of productive resources and lead to growth, or cause a further squeeze on the already hit underclass remains to be seen
The Indian economy was battling a crisis even before the Covid-19 pandemic threw it off the rails: The gross domestic product (GDP) growth has been falling for the past three years, and from a peak of 8.26% in 2016-17, it had slowed to 4.18% in 2019-20; to make matters worse, questions were raised on the veracity of official GDP data, and when Arvind Subramanian, chief economic advisor in the Narendra Modi government’s first term argued that the numbers were overestimates, the credibility crisis grew bigger. That the government held back the release of a report on employment until after the 2019 elections and junked a consumption survey after the findings were leaked to the media further muddied the waters.
Then, Covid-19 struck.
In August, when GDP estimates for the quarter ended June were released, all this took backstage, and for a valid reason. Thanks to a nationwide 68-day hard lockdown that started on March 25, India’s GDP contracted by a massive 24%. There has been a sequential recovery since, with the September contraction easing to 7.5%, but the Reserve Bank of India (RBI) expects the economy to shrink by 7.5% in the current fiscal year. The public discourse has suddenly shifted from high growth to merely growth. RBI’s Monetary Policy Committee’s projections of the economy growing at 0.1% and 0.7% in the quarters ending December 2020 and March 2021 have been received with enthusiasm.
That the Indian economy is making a sequential recovery (month-on-month) is beyond doubt. Measures such as the Nomura India Business Resumption Index (NIBRI) suggest that economic activity is already very close to pre-pandemic levels. However, that is not the central question anymore. Come June 2021, the base effect will give an artificial boost to growth numbers for at least four quarters. For instance, even if the June 2021 GDP growth rate is 20%, it would mean that in absolute terms the GDP would still be lower than what it was in the quarter ending June 2019.
The real economic challenge for India lies beyond 2021-22. Once the favourable base effect has subsided, what will India’s growth trajectory be? It is this question that has polarised economists.
For better or for worse?
One school of thought — the government subscribes to this — is that the pandemic’s shock has unleashed what the Austrianborn Harvard economist Joseph Schumpeter described as the process of creative destruction. Inefficient businesses and policies, which were holding back the India growth story, have perished with the pandemic and what awaits us is a radical realignment of productive resources which will unleash hitherto untapped tailwinds for growth.
This would not have been possible had the government not unleashed second generation reforms in critical areas such as agriculture and labour, which its predecessors shied away from implementing, not because of ideological differences but lack of political will and mandate. More could happen on this front, especially on disinvestment and perhaps corporate houses being allowed to run banks once again. There are credible and respected economists who subscribe to this.
The other school of thought — and this too has credible economists subscribing to it — believes that the pandemic’s shock will only exacerbate the crisis the economy found itself in earlier. The pre-pandemic economic slowdown was not a result of lack of second-generation reforms, but a lack of demand, they argue. India’s rich, while they are a significant number in absolute terms, are not enough to drive the country’s macro growth story. They might also have increased their precautionary savings in the wake of the pandemic.
It is the poor, who spend a much larger part of what they earn, sometimes even more, who matter for mass demand and hence growth. It is this large underclass, whose incomes took a hit from policies such as demonetisation and the Goods and Services Tax, which has also suffered disproportionately during the pandemic. While the policy response offered them subsistencelevel support through increased allocations on the rural employment guarantee scheme and free ration, it has not done much to provide what economists refer to as a fiscal counter-cyclical boost, which is the response of most governments to the threat of recession. On the contrary, the reforms might trigger a fresh income squeeze on this underclass. For instance, with the new farm laws, in the name of getting rid of local middlemen, farmers may be exposed to corporate buyers with much larger bargaining power than earlier. The labour reforms, under the recently released passed labour code bills might have done away with even basic protections at workplace. The current recovery is more likely to be profit-led than wage-led, economists are telling us. This also means that it has a much smaller base.
A people’s assessment
Both arguments have their merits, and their proponents. Interestingly, there are enough data points to support both arguments. If high-frequency indicators support one, consumer confidence surveys, support the other. And the comprehensive employment and consumption spending data (the best proxy for income data in India), indispensible for this debate to be settled, is as yet unavailable. This is exactly why the state of politics needs to be tracked as closely as the economy.
In Narendra Modi, the Bharatiya Janata Party (BJP) has a leader whose popular appeal is unmatched by any Indian politician in decades. While there is a clear ideological, Hindutva component to Modi’s popularity, it is also based on a simultaneous process of delivering centralised welfare benefits to a large number of poor people.
The ability to keep delivering on this front depends on budgetary resources, themselves a function of overall economic growth. While moves such as demonetisation and the implementation of GST in Modi’s first term were portrayed as a surgical strike against the corrupt, the current reforms are being sold as changes which will boost the income of the poor.
Which is why, the only thing that can be said with certainty at this point of time is that the jury assessing the economy’s performance is likely to move beyond economists and include the people at large.