Actual 2020-21 Q1 GDP contraction much higher than 23.9 per cent, economic situation dire

The Indian economy shrank 23.9 per cent year-on-year in the first quarter (Q1) of 2020, i.e. from April to June, much worse than market forecasts of an 18.3 per cent drop. This is the biggest contraction on record in India’s statistical history as the Coronavirus-induced nationwide lockdown aggravated an already terrible economic situation.

Based on the data put out by the National Statistical Office, the Q1, FY 2020-21, GDP is at -23.9%. The state of the economy can be gauged from various sectoral indicators: Industries at -38.1 per cent, Services at -20.6 per cent, Manufacturing at -39.3 per cent, Agriculture at 3.4 per cent, Trade and Hotels at - 47 per cent, Mining at -23.3. per cent, Power and Gas at -7 per cent, Public Administration at -10.3 per cent, Construction at -50.3 per cent.

For the first time in India’s recorded statistical history, all the eight GDP segments, except agriculture, have seen major contraction in the April-June quarter of 2020.

D K Joshi of Crisil said, “Overall numbers are in-line with what data was indicating. Investment growth has been going down for quite some time and investment growth slowdown is understandable in this environment. Issue is what will revive first: investment or consumption. We assume investments will stay weak, expect to see consumer behaviour changing.

Indranil Pan of IDFC said, “We estimate average consumer price inflation (CPI) at 4 per cent by Q4.” He ruled out further rate cuts by RBI till February.

Surajit Das, assistant professor at the Centre for Economic Studies and Planning, JNU, said, “Since quarterly estimates rely on time series projection and in the absence of actual data, past values tend to influence upward bias, I would say the contraction is much more than the 23.9 per cent announced. I would say in Q1, 2020, the GDP might have contracted by almost 50 per cent.”

Das is right. In India, data on agriculture is collected bi-annually and that on industries annually. Service sector data often is collected once in three to five years. As quarterly estimates are not based on surveys, it also fails to take into account the unorganised sector that employs about 92 per cent of India’s 45-crore-strong workforce.

“Even the agriculture growth figure of 3.5 per cent appears outlandish and not in sync with the reality,” Das said, adding that he expected Q2 (July to September) and Q3 (October to December) to be in the negative as well. “I would say in Q4 (January to March, 2021), GDP may level out which means no growth but no de-growth as well. Overall, the GDP on an YoY basis is set to contract by as much as 20 per cent.”

But what is dangerous about this contraction is that is it would render almost 20 per cent of people out of the workforce as unemployed within a year, i.e, almost 9 crore people. Added to the 3 crore already involuntary umemployed, it means 12 crore Indians will be unemployed within a year which can lead to unprecedented social disturbances and worsening law and order situation. Nearly every survey has seen consumption slide and indebtedness rise, specially amongst the rural and urban poor.

Unless the government goes for expansionary fiscal and monetary policy as soon as possible, the Indian economy may take almost five years to recover from this jolt. If aggregate demand won’t pick, investment won’t pick up and employment won’t be generated.

The government can’t blame its cash-strapped status to deflect its incompetence. The economy plummeted after Demonetisation and implementation of a faulty GST regime.

In the current climate of demand depression, the government has a golden chance to monetise the economy by borrowing from the RBI as it offsets the risk of inflation. At least five per cent of the GDP needs to be infused into the economy. The RBI is sitting on a Forex reserve pile amounting to almost 18 per cent of the GDP. Ten per cent is adequate, so around 8 per cent is readily available.

This money must go into ensuring universal employment guarantee for the rural and urban poor with wages revised to Rs 350 a day for rural India and Rs 450 for urban India.

As states have been at the forefront of the fight against COVID-19 and as most social sectors are the state’s responsibility, the Centre needs to clear their dues fast.

Compensation for income loss should ensure adequate demand pick-up. That means Rs 7,000-8,000 a month in every Jan Dhan account and not Rs 500-1000.

Also the planned expenditure of the coming four-five years needs to be spent within the next two years. With such front loading of public expenditure plus short term borrowing from RBI, the economy may revive within two years.

But all this demands a proper plan for revival, a big demand side push, a big push to government expenditure. The Modi government needs to take this problem seriously and realise that this is not the time to practise fiscal conservatism.

India's private final consumption expenditure (PFCE) for April-June 2020 too has fallen by 54.3 per cent, compared to a 56.4 per cent growth in the same period a year ago. PFCE is a realistic proxy to gauge household spending. Discretionary spending has been hit hard with sales coming to a grinding halt.