From the fastest growing major economy in 2015, India became one of the slowest in the world in 2020 as its growth plunged to -7.3%, compared to the global fall of -3.1%. That tells its own tale, writes Prasanna Mohanty
The government thinks a 1.6% growth in FY22 over FY20, when growth was just 4%, is back to high growth. But India’s annual average growth for 15 years before FY20 was 7%. To reach that level, it will have to address many structural challenges
After claiming a V-shaped recovery (“India will be among only a few economies in the world to rebound strongly from COVID-19 induced economic contraction of 2020-21”) and that India would become “the fastest growing one in the world” — all on the basis of first two quarters of GDP numbers for FY22 — the Finance Ministry’s November 30, 2021 report gets factual: “The MPC (RBI’s monthly monetary policy committee report) in its December statement has maintained the growth forecast of 9.5 per cent during FY 2021-22 (full fiscal), implying a full recovery and a 1.6 per cent growth over pre-pandemic GDP level of FY 2019-20.” (emphasis added). But, what does the above sentence actually mean?
Illusions of a V-shaped recovery
It means, the growth for full FY22 will be 9.5% (over -7.3% in FY21) but this would translate to only 1.6% growth over FY20. The FY20 growth was 4%.
This is hardly inspiring, especially since India’s average annual GDP growth during the previous 15 years, between FY05 and FY19, was 7%!
All economies were hit by the pandemic. The IMF’s World Economic Outlook report of October 2021 (which uses official data of all countries) says, global GDP will bounce back from -3.1% in 2020 (the pandemic year closest to India’s FY21) to 5.9% in 2021 (India’s FY22); advanced economies (average) from -4.5% to 5.2%; emerging economies (average) from -2.1% to 6.4% and India will bounce back from -7.3%to 9.5%.
From the fastest growing major economy in 2015, India became one of the slowest in the world in 2020 (ranked 142 out of 194 countries) as its growth plunged to -7.3%, compared to the global fall of -3.1%. That tells its own tale.
Now let us see the actual quarterly GDP numbers released in November 2021. It shows in the first two quarters (H1) of FY22, the GDP at constant price was `68.1 lakh crore. This is lower than `71.3 lakh crore in H1 of FY20. So, the GDP hasn’t yet reached the FY20 level at this stage. Whether it will do in the full fiscal is purely speculative.
The official data also reveals that private consumption (PFCE), the most powerful growth engine contributing 55% to the GDP, is far off from FY20 level — `37.3 lakh crore in H1 of FY22 against `40.4 lakh crore in H1 of FY20. Actually, it is less than `37.9 lakh crore of H1 of FY19 too.This means, consumption demand hasn’t recovered to the FY19 level.
When demand engine slows down, it drags down other growth drivers: production of goods and services, capital expenditure (investment) and imports. Even this H1 GDP numbers don’t reflect the real state of the economy.
That is because quarterly GDP is estimated mostly from organised/formal sector numbers (high-frequency indicators). The pandemic hit the unorganised/informal economy, which contributes nearly half of the GDP, the harder. Therefore, the quarterly GDP is likely an overestimation.
There is enough evidence to show unorganised/informal sector grew in size due to the pandemic — explained later — thereby making the quarterly GDP numbers even more off the mark.
Yes, stock markets boomed during the pandemic crisis (2020 and 2021) but stock markets are disconnected from the real economy as economic literature tells. Further, the pandemic saw massive loss of lives, jobs and businesses (loss of income) and the economy plunging to new lows and yet stock markets boomed.
Why did the pandemic hit India harder?
The reasons are several; one being low government (fiscal) spending. The Finance Ministry’s March 2019 report had already warned that only this engine (government spending) was working, the three other engines — private consumption (PFCE), capital investment (GFCF) and net exports (exports minus import) — had sputtered out.
That is why eminent economists Amartya Sen, Abhijit Banerjee and Raghuram Rajan repeatedly pleaded for higher government spending. The government ignored them and its massive `23.66 lakh crore pandemic relief and stimulus packages of 2020 had fiscal spending component of just 1.6% of the GDP. In contrast, developed nations spent much more, the US, for example, spending more than 10%.
The budget for FY22 saw a minor correction with budget expenditure going up by just 1% over FY21 (RE) level. Given that government expenditure (GFCE) contributes about 11.5% to the GDP (in H1 of FY22), a 1% increase is too small to boost significant growth in FY22.
The two pandemic waves saw more than 4,75,000 deaths (third highest after the US and Brazil) and more than 34 million cases (second highest after the US). Since 60 million Indians slip into poverty every year due to ‘catastrophic’ healthcare cost in normal times, as the government admits, this means the pandemic (higher cost of treatment) would have pushed several multiple of this number into poverty. The Pew Research said the first wave alone might have pushed 75 million into poverty (with incomes of $2 or less a day) — contributing “60% to the global rise in poverty.”
A study by the Azim Premji University showed15 million jobs were lost permanently (by the end of December 2020); there was 50% rise in informal workers as salaried/regular wage jobs shrunk and workers migrated to informal self-employment (30%), casual (10%) or informal salaried (9%) work and 90% people survey said their food intake had reduced.
The OECD countries saved 50 million jobs during the pandemic in 2020, India didn’t any. It doesn’t even have data on job or business losses/closures. Other than subsidised ration (which didn’t reach migrant workers due to lack of data), the government offered little help to poor households who suffered the most.
As a result, India was the only country to witness massive distress migration to rural India and the demand for menial work under the MGNREGS went up dramatically. The number of households worked under this scheme rose from 54.8 million in FY20 to 75.5 million in FY21 and the number of individuals from 78.9 million in FY20 to 111.9 million in FY21. The trend continues in FY22 too (63.3 million and 90.7 million by December 13, 2021).
The people and the economy received a far bigger shock also because of gross incompetence of the government, which centralised all powers invoking the National Disaster Management Act of 2005, in handling the pandemic. There was no planning, no strategy and no preparations in announcing the lockdown. The same was the case with the unlocking and the second wave of 2021 which had been forewarned. Then, the second wave saw super spreader events like the Kumbh mela and month-long election rallies in West Bengal.
The pandemic crisis also saw a focus shifting to long-term “reforms” like new farm laws, new labour codes, declaration of en masse privatisation of public assets, monetisation of existing brown-field infrastructure (roads, ports, railways etc.) and inward-looking import substitution policy, instead of fire-fighting the pandemic called for. But the plunge to -7.3% in FY21 wasn’t all because of the pandemic mismanagement.
Pre-pandemic slowdown
India was already in a prolonged slowdown when the pandemic hit in early 2020.
This slowdown was due to a series of man-made disasters: the twin shocks of demonetisation and GST (both hurt poor households and informal economy); shutting down policy and planning body (Planning Commission of India) without a suitable replacement (NITI Aayog cheerleads the government, rather than provide rational policy inputs); fudged 2011-12 GDP series which inflated growth rates by 2.5 to 3.7% percentage points during FY12-FY17, as former CEA Arvind Subramanian pointed out; corporate tax cut of `1.45 lakh crore amidst fiscal constraints in 2019 and lack of critical data (impact of these pre-pandemic disasters on jobs and businesses) for policy making.
The combined impact was:
A study by Ashoka University-CMIE showed that during the five fiscals between FY12 and FY21, jobs shifted from formal to informal sector. It noticed three disturbing trends:
The PLFS of 2019-20 (pre-pandemic) showed a similar trend, as did the Azim Premji University study mentioned earlier, leading to a sharp decline in income and rise in poverty level.
The road ahead
Once the above facts and evidence are acknowledged, the road ahead becomes obvious.
There is a need for both short and long-term measures.
The short-term measures are to address the pandemic distress and hence, should focus on direct income support (cash transfers) to poor households as well as to struggling SMEs. This will revive consumption demand. A national employment policy (NEP) to focus on creating jobs, particularly in urban areas, should also get priority.
The long-term measures are to address structural challenges that have emerged and caused the prolonged slowdown. This calls for a complete overhaul of the extant economic thinking. The focus needs to shift from promoting growth of top 10% or top 1% in the economic pyramid to the rest 90-99% of people who also constitute the economy. Without improving the social and financial health of 90-99% of the population, no economic growth will be sustainable in the long run.
Such policies then relook at skewed tax regime (tax burden less on those who can pay); indiscriminate handing over public assets to private business; industries running banks; laws that hurt the interests of farmers and workers and self-defeating import substitution and many more.
The writer is a journalist and researcher. He writes on public policy, politics, governance. His latest book An Unkept Promise: What Derailed the Indian Economy, has been published by SAGE Publications India