Of GDP contraction and challenges ahead

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By DM Deshpande

After some delay in data collection and compiling due to the pandemic, the second quarter April-June GDP growth data has been released. For most of this period, the economy was under one of the toughest lockdowns due to COVID-19. Hence, the news did not come as a surprise. Perhaps, the extent of contraction by nearly a quarter is not something the experts had expected. 

To put the fall in GDP in perspective, it is a decline for the first time in forty years. Barring agriculture which grew by 3.4 per cent, all the remaining seven sectors that are captured for aggregating GDP, posted negative growth for the period. Even here, growth has been muted; agriculture was expected to grow five per cent, construction and manufacturing were the worst affected, falling by over 50 per cent and 39 per cent respectively.

Bulk of the non-financial sectors such as hotels and trade declined 47 per cent.  Major sectors that generate jobs in larger numbers are hit hard by the pandemic. Just two sectors have been able to limit degrowth to single digit, viz. financial, real estate and professional services (5.3 per cent) and electricity, gas, electricity, water supply and other utilities that fell by 7 per cent.

Work from home seems to have saved these sectors from huge declines. In hindsight, India’s harshest lockdowns should not have included construction, which has hit several infrastructure projects-metros, roads, bridges, buildings, railways, et al. Several big economies including China did not include their services and construction in the lockdown because of their huge contribution to GDP.  

Even during normal times, getting authentic and verifiable GDP data is a daunting task in India due to the dominance of the informal economy. In the absence of data with regard to the informal economy, it has been based on the assumption of growth in the formal sector. Since the informal sector is one of the worst hit-it accounts for 94 per cent of total employment and 45 per cent of the output- the actual degrowth may even be higher than what is now projected. This will be known when the GDP data is revised as information starts pouring in later in the year.       

India is, without doubt, one of the major economies that has been impacted hugely by lockdown. As soon as the GDP growth numbers were released, it led to a raging debate as to whether India was the worst performer or was it the US. The US, it was argued, registered negative growth of 32 per cent. Actually, these numbers could be misleading, for, GDP measurement methods and periods taken for comparison vary widely across the globe.

For example, we measure GDP ‘year on year’ meaning, we compare second quarter GDP growth (2020) with the same period of last year (2019). In the US, comparison is with the immediate preceding period, that is, second quarter April-June 2020 is compared with the first quarter Jan-March 2020. Hence, it is better to rely on projections and forecasts made by IMF, World Bank and others who calculate and bring down the data to comparable levels. Conceived in this way, the decline in US GDP growth is 9.1 per cent far lower than India’s 23.9 per cent for the said quarter according to the IMF.

    The UK contracted by over 20 per cent, Malaysia by 17.1 per cent and Euro zone by 15 per cent. China alone, amongst the major economies, showed a positive growth rate of 3.2 per cent because by then it had already come out of the worst phase of COVID-19. When the virus was rampant in China, it had also degrown. The pandemic has not hit countries at the same time; it’s peak and fall also have to be taken into account in the analysis of GDP numbers.

The current crisis calls for changing the government stance from cautious to bold. Till such time that the economy does not show clear and sustainable growth signs, the private sector will not invest additional capital. Rising stock market is helping a few large firms to build oligopolistic structures with little addition to employment numbers. The government has been talking about Booster Plan 2.0 for some time. Even with regard to the grand announcement of Rs.100 lakh crores investment on infrastructure over the next five years on Aug 15, there is little action on the ground.

The numbers of COVID-19 cases are rising precipitously; the economy is not returning to normal activity; hence, there is an urgent need for cash transfers to the poorest sections of the society. The chief economic advisor says we have kept a lot of powder dry to be released at the right time.

True, the government still has the ability to spend more but it is not doing so. In a crisis of this scale and magnitude, speed is of essence. GDP has collapsed and the economy is poised for further and continued declines for at least next two quarters. Thereafter, things may improve but for that to happen bold action on the part of the government is needed now.         

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.