Slide in GDP: Picture Abhi Baaki Hai?  Why blame God?

Two old tweets of Narendra Modi, the chief minister, returned this week to haunt Narendra Modi, the Prime Minister.

As the chief minister of Gujarat, he had tweeted in June, 2012: “UPA Government has given a 9-year low GDP growth in a quarter. With monsoon deficient till now, where are we heading as a nation”? Well, in 2020 despite a good monsoon the GDP growth has been declining over the last nine quarters and the contraction in the first quarter of 2020-21 is the highest after Independence.

The Gujarat chief minister had again tweeted in November, 2013, “Economy is in trouble, youth want jobs. Devote more time to economics, not petty politics. Chidambaram Ji, please focus on the job at hand.” In 2020, not surprisingly, former finance minister P. Chidambaram, now in the opposition, resurrected the tweet this week and quipped, “I have to say the same thing to the honourable Prime Minister”.

The jury is out on how helpful the quarterly computation of GDP growth, introduced in 1996, really is. But the announcement on August 31 that India’s GDP had contracted by a staggering 23.9% spooked economists and industry alike. Many believe this is just the trailor of a horror film and much worse will follow.

The Government, which grandiosely announced a Rs 20 lakh financial stimulus in April and which has been waxing on achieving a five trillion Dollar economy and maintaining a 10% annual economic growth, is still unfazed. There is little the Government could have done, suggested finance minister Nirmala Sitharaman, because the slowdown was caused by the ‘act of God’. The Chief Economic Advisor also confidently declared that a recovery was round the corner, echoing the Prime Minister who has been seeing ‘green shoots’ in the economy.

Indeed, a former member of the PM’s Economic Advisory Council could barely suppress his irritation. He had been asked to comment on the Chief Economic Advisor’s statement on Monday, August 31 that the Indian economy would see a V-shaped recovery in the second and the third quarters. The letter ‘V’ in the English alphabet indicates in Economics a steep decline followed by an equally swift rise. “The CEA K.V. Subramanian has just said we are going to see a V shaped recovery in various sectors in Q 2 and Q 3. What’s your take on that?”, Rathin Roy was asked hours after the GDP figures for Q1 were released.

With barely veiled sarcasm Roy replied, “Did he? I wouldn’t know. I do economics, not the alphabet. If my economics resembles an alphabet, I first elucidate and then indicate the logic of the resemblance. I am simply not competent to do it in reverse order.”

Roy, now the Managing Director of Research and Policy at the Overseas Development Institute in London is a former Director of the National Institute of Public Finance and Policy (NIPFP) in New Delhi. He was also a Member of the Prime Minister’s Economic Advisory Council till last year. And he has been raising a red flag on the Indian economy for quite some time.

Last year in May, Roy had this to say to an interviewer on TV, “We are heading for a structural slowdown. This is an early warning. The economy since 1991 has been growing not on the basis of exports... but on the basis of what the top 100 million of the Indian population wants to consume,” he said.

Those 100 million or 10 crore Indian consumers who were “powering” India’s growth story, he said, had started plateauing out. “It means in short we will not be South Korea. We will not be China. We will be Brazil. We will be South Africa. We will be a middle-income country with large numbers of people in poverty and see rising crime.” Even more ominously, he had said, “in the history of the world, countries have avoided the middle-income trap but no country once in it, has been able to get out of this.”

The quarterly drop of 23.9% is the largest since quarterly GDP data began to be compiled and released in 1996. Before that annual rates of change of GDP were calculated. There are only four instances of a contraction in the post-Independence period: 1957-58, 1965-66, 1972-73, and 1979-80. The largest annual contraction thus far was 5.2 percent in 1979-80. That is why, a quarterly drop of 23.9% is really a big deal.

The severe and sudden lockdown in March, 2020 had put the brakes on the Indian economy as it had done after Demonetisation in November, 2016. It was, as an economist had then described, like firing a bullet at the wheel of a fast-moving sports car. Despite the grandiose expectations from the GST, the economy never quite recovered. With the economy abruptly shutting down in March this year at four hours’ notice and economic activities coming to a standstill, it was expected that GDP growth would decline. But it is the extent of the fall that came as a shock. Contrary to economists hoping that it would decline between 10 and 15%, it fell by a staggering -23.9%.

The figure would have been worse but for the Agriculture sector, which grew at 3.4% and Government’s own consumption expenditure, which grew by 16.4%.

But mining contracted by as much as 23.8%. Manufacturing contracted by 39.3%. Construction contracted by 50.3%. Trade, hotel, transport, communication contracted 47%. Financial services sector contracted by 5.3%. Public administration, defence and other services contracted by 10.3%. Private consumption, reflected in private final consumption expenditure, fell 26.7%. Investments, as reflected by gross fixed capital formation, contracted 47.1%. Luckily the first quarter coincided with the sowing season and agriculture activities kept the wheels of the economy running. The Government’s financial stimulus (Rs 20 lakh Crore according to the Prime Minister) and Government’s consumption expenditure, which rose by over 16%, also helped. However, the credibility of this Government’s data is unfortunately not very high. Not surprisingly, therefore, almost immediately questions were raised about the authenticity of the figures and the extent of the fall. Several observers felt the actual fall was worse than the Government cared to admit.

“How can hotels and hospitality contract by only 47% during April-June when there was almost complete shut down,” wondered many with some suggesting that the contraction in the sector could be as high as 80% or more.

Pronab Sen, former chief statistician of India, explained that the quarterly estimates are based on corporate data of listed corporates, and not the smallest companies. “We suspect that smaller companies would have done worse than the larger companies, so we should expect one round of revision on that count. The second revisions will happen when the informal sector data comes in, which could lead to larger revisions.”What he meant was that GDP figures of the first quarter are based on the performance of only a section of the organised sector. Downward revisions are almost inevitable as performance of smaller companies and the informal sector, which contributes half of the GDP, during the first quarter are taken into account, the latter largely based on intelligent guesses.

But the Finance Ministry seems to believe that the economy is an engine which can be switched on and off at will. The lockdown shut down the economy, they admit but the unlocking would seamlessly kick start the economy. Simple, see?

Government and the BJP tried to gloss over the bad news. While BJP till last week was circulating optimistic predictions of a GDP growth of 1.9% in the first quarter, with all other major economies registering negative growth, RSS ideologue and a government nominee in the Reserve Bank of India’s Board of Directors, S Gurumurthy claimed that contraction in the US economy had been higher than India’s. The US economy, he wrongly asserted before correcting the figure a day later, had contracted by 31%. Actually, the US economy had contracted by just 9%. Among all the major economies, India’s contraction of the economy has been the highest.

An economist put the controversy in perspective. A richer and more robust economy declining by 10% would do less damage to its economy and people than a similar decline in a poor economy. In India, the contraction would result in severe job losses and set the economy back.

Other BJP supporters also criticised the negative media coverage (several TV channels however refused to discuss the GDP with an anchor at a channel telling a panelist who insisted on talking of GDP and not the suicide of Sushant Singh Rajput that he was wasting the nation’s time). “Leftists do nothing but sit on the fence and shout that sky is falling… walk the streets and see how even the last man is striving hard to take one step at a time ...despite doomsday soothsayers in ivory towers,” fumed a BJP supporter.

But criticism of the Government’s mishandling of the economy and it not pursuing a coherent plan of action just would not be muted. The irate comment by an economist that “In any other country, the FM and the planners would resign or lock themselves behind doors and wish they would vanish. Not in India. We are dealing with a shameless and thickskinned government. They will defend this too,” by an economist summed up the general mood.

But the Government continues to put up a brave front. Krishnamurthy Subramanian, the Government’s chief economic advisor, extended the ‘hand of God’ justification and said that the pandemic was a “once in a one and a half century event” that India and the world was going through.

He claimed Railway freight, a good indicator of economic health, had reached 95 per cent of its level last year. Power consumption is 1.9 per cent lower than last year and collections from e-way bills are up (showing increased transport movement). The principal economic advisor at the finance ministry Sanjeev Sanyal too said optimistically that India is the only country that is in a position to cut interest rates and a further cut, he hinted, would stimulate demand and investment.

For the country’s sake, it is hoped they prove the doomsday prophets wrong.