Economists say: No more a recession, India headed towards ‘depression’

The Indian economy is in a tailspin and India may actually be looking at something worse than a recession.

India has never faced a sustained long-term downturn in economic activity in its 73 years of existence as an independent country. But there is now every possibility that India is looking at a ‘depression’ for the first time in its history, a possibility flagged by several economists.

While everyone now has accepted the inevitable, that the GDP will contract in the current financial year (2020- 2021), the estimates vary. The World Bank pegs it at 3.2 per cent while Crisil puts it at 5 per cent. An RBI survey paints the rosiest picture as of June 10, saying that the economy will contract by only 1.5 per cent.

However, several economists warn that the impact will likely be much worse. Surajit Das, assistant professor at JNU’s Centre for Economic Studies and Planning (CESP), puts a perspective to the situation.

“Since economic recovery does not happen overnight, economic activities in the next few quarters will also take some time to recover. Looking at GDP from an output and employment point of view, I would say you are looking at anything between a 15 and 22 per cent contraction,” he says.

Das’ ominous predictions are not without ground. According to India’s retail association, sales of non-essential items - such as clothes, electronics, furniture - fell by 80 per cent in May. Even sales of essential goods - such as groceries and medicines - dipped by 40 per cent.

An independent countrywide survey involving 1,000 respondents carried out by research scholars at CESP found out that at least 80 per cent of them have put off plans of purchasing consumer durables (ACs, washing machines, TVs and other white goods), automobiles and real estate while also postponing domestic travel plans.

Veteran economist Arun Kumar in fact thinks the contraction of GDP in the months of the lockdown has been even more severe.

“I would say about 75 per cent of the GDP was wiped out in April and about 65 per cent in May. Exports, investment and consumption, all three engines of growth went into a tailspin,” says Kumar.

Kumar goes further in saying, “India would be the first country in modern history to face a depression. It would take at least three to four years to emerge out of it.”

“In the current fiscal, the GDP is set to contract by at least 30 per cent. My estimate is that from Rs 204 lakh crore, our GDP will come down to Rs 130 lakh crore. Tax to GDP ratio will fall from 16 per cent to 8 per cent. In such a situation, it would be difficult for the government to pay salaries or finance the defence budget.”

Das agrees and says, “I will strongly urge the government to universalise the MGNREGA programme and expand it to urban areas. About 50 crore Indians live in urban and semi-urban areas and there are scores of non-salaried people there who do not work in the organised sector. I will also call upon the government to remove the 100 days cap and revise the pay from Rs 202 a day to Rs 350 in rural areas and Rs 450 in urban areas. These are absolute musts till these people find employment again,” he says.

While economists have been saying time and again wage-led growth that will boost demand is the only way to remedy the situation, the government seems to think supply-side interventions will save the day. More demand leads to more output and profit and more employment. Unless the government wakes up to the reality that without aggregate investment there would be no change in demand, output and employment, the situation is likely to get worse.

Liquidity infusion into banks is meaningless unless that money reaches the economy. Loans at lower interest will simply be used by old borrowers to service old loans and not get translated into aggregate investment. Already, non-food credit offtake growth is in the negative.

Kumar has prescriptions for the government. He calls it the survival package. “See, at least 20 crore people have lost their jobs. If you take 4 persons per family, 80 crore people are looking at penury and starvation if the government does not step in. They have fallen below the poverty line. Even if the government pays them half of the World Bank’s Extreme Poverty Line wage of $1.99 that is $.99, that will cost the exchequer around Rs 18 lakh crore per annum. Adjusted with MGNREGA and other schemes, the government will still need to marshal an additional Rs 15 lakh crore.”

So assuming health expenses of Rs 2 lakh crore and a bare-minimum survival package for the micro sector at Rs 6 lakh crore, the government will have to find an extra Rs 24 lakh crore which will push fiscal deficit to almost 50 per cent of the GDP.

Kumar says even the wealthy will lose value of their investments in stocks and real estate. “I expect their wealth to decline by around two-third. In such a situation, wealth tax won’t be an option too. They will have to monetise by borrowing from the RBI which will issue bonds. People across the organised sector will have to sacrifice and take pay cuts. Otherwise, the system will collapse,” he says.

Kumar is totally on point here. The government’s GST collections in April 2020 has been found to be 15 per cent of what it was in the same month last year. With low demand and output, Corporate Tax will fall. With loss of jobs and pay cuts, so will Income Tax. In such a situation, monetisation will remain the only way.

A detailed analysis by Pronab Sen, former Chief Statistician of India, that was published in Ideas for India, an Indian Expressinitiative over the last weekend, showed India’s economy will contract not just this year but also in 2021-22. That means not recession and depression.

The study says India’s absolute GDP is likely to struggle to even come back to the 2019-20 level by 2023-24, which is the last year of this government’s current term. This is the same thing Kumar has said.

“As things stand, and the government retains the 2020-21 expenditure budget for 2021-22 as well, it is likely that 2021-22 will witness a GDP growth rate of -8.8%. This is a frightening thought since it means that the country could experience a full-blown depression – the first in our history as an independent nation,” says Sen.

The Indian economy was already in a bad shape, reeling under the long-term effects of Demonetisation and a hasty implementation of an ill-conceived GST plan. COVID-19 came as the proverbial Black Swan to hammer the nails into India’s economic engine.

Unless the Government of India acts fast and listens to those who advocate wage-led growth, India is looking at famines, mass starvations, massive uptick in crime rate, total civil unrest, collapse of law and order and a total decimation of the system. And this government will be remembered in history as one which stood and watched as one of the promising emerging economies in the world went into absolute penury and anarchy.

The Indian economy was already in a bad shape, reeling under the long-term effects of Demonetisation and a hasty implementation of an ill-conceived GST plan. COVID-19 came as the proverbial Black Swan to hammer the nails into India’s economic engine.

Unless the Government of India acts fast and listens to those who advocate wageled growth, India is looking at famines, mass starvations, massive uptick in crime rate, total civil unrest, collapse of law and order and a total decimation of the system.

And this government will be remembered in history as one which stood and watched as one of the promising emerging economies in the world went into absolute penury and anarchy.