BOOSTING GROWTH: LEAVING MUCH TO BE DESIRED

Economic planning requires well preparedness to meet the challenge of a better growth rate.

The prolonged lockdown caused by the COVID-19 pandemic has led to the further worsening of the Indian economy, which was already suffering from a lacklustre performance prior to the lockdown. Considering the severity of the lockdown, the persistence of the poor economic performance consecutively two quarters in a row is an obvious outcome. In fact, the official numbers understate the economic malaise.

According to the recent press release of the National Statistical Office (NSO) (dated 27 November 2020), the real gross domestic product (GDP), the measure of national income in the country, has contracted by 7.5% in the second quarter (Q2, July–August) of 2020–21, but the rate of contraction is considerably lower than (-)23.9% recorded in the previous quarter (Q1, April–June). In 2019–20, real GDP grew at 5.2% and 4.4% in Q1 and Q2, respectively.

During the first half (H1, April–September) of 2020–21, the economy contracted by 15.7%, compared to the growth rate of 4.8% during the corresponding period of the previous year. With COVID-19 restrictions being gradually relaxed since June 2020, some recovery is expected in Q2 but by itself leaves no room for complacency.

The real gross value added (GVA) at basic prices dipped by 22.8% in Q1 and by 7.0% in Q2 of 2020–21, against increases of 4.8% and 4.3%, respectively, in Q1 and Q2 of the previous year. In H1 of 2020–21, GVA is pegged to fall by 14.9%, compared to a positive growth of 4.5% reported in H1 of 2019–20. Agriculture grew by 3.4% in Q1 of 2020–21 when all other sectors’ growth was derailed to the negative zone.

The agriculture sector has sustained the same growth rate in Q2 as well. Except the manufacturing sector and electricity, gas, water supply and other utility services, the growth of all other sectors continues to remain beleaguered in Q2. Interestingly, the real manufacturing GVA grew at 0.6% in Q2 compared to (-)39.3% in Q1 and (-)0.6% a year ago. Even this manufacturing growth is suspect in the face of serious data problems.

One of the important indicators used for quarterly estimates of national income is index of industrial production (IIP). For a while, the NSO’s press release related to IIP maintained that reporting by establishments was poorer in the wake of the COVID-19 lockdown, and apparently, the reporting rate has improved in recent months.

The average of IIP for H1 (April–September) of 2020–21 shows that general IIP declined by 21% compared to its growth of 1.3% recorded in H1 of 2019–20. Similarly, manufacturing IIP fell by 23.6% against positive growth of 1.0% in H1 of last year, and electricity IIP dipped by 8.0% against its growth of 3.9%. Particularly, manufacturing IIP does not show any appreciable recovery in recent time; it declined by 40.3% in Q1 and 6.8% in Q2 of 2020–21.

The use-based classification of IIP reinforces the fact that the absence of the investment momentum has hurt industrial growth. The capital goods segment of IIP contracted by 64.8% and 13.6%, respectively, in Q1 and Q2 of 2020–21 and consumer durables by 67.6% and 10.2%, respectively, during the same period. Though the consumer non-durables segment contracted by 16.9% in Q1, it grew by 1.2% in Q2.

The weight of non-durable goods is 15.3%, whereas that of capital goods and consumer durables is 8.2% and 12.8%, respectively. Except for consumer non-durables, there has been negative growth across all other segments of IIP, ­including infrastructure/construction. The turnaround in manufacturing remains awaited. Indeed, manufacturing has been losing its tempo since 2015–16; the growth of the sector’s real GVA peaked at 13.1%, and this gradually fell to 0.03% in 2019–20.

The economy was already in a dire state even before the COVID-19 crisis, with the growth momentum tapering off for a while. After peaking at 8.3% in 2016–17, the growth rate of real GDP has been continuously sliding to 4.2% in 2019–20—this is likely to be lesser when subsequent revisions take place. Thus, the economy was in a fragile state and it simply lacked adequate cushion to withstand the COVID-19-induced shock.

Although the severity of COVID-19 began to surface since December 2019 in major economies, the Union Budget 2020–21 took no cognisance of the downward risks associated with it. Rather it actually committed itself “to the path of fiscal con­solidation” and fiscal deficit was fixed at 3.5%. This was a deviation by 0.5% from the target of 3% for 2020–21, largely due to the significant tax reforms undertaken to boost investment, arguably of the corporate sector.

Thus, there was no preparedness to face the storm that was going to strike at the very root of the eco­nomy. The most pathetic sight of the millions of migrant ­labourers was reflective of this apathy shown by the authorities in the initial period. Once faced with the crisis, relief packages were rolled out mostly under the guise of Atmanirbhar Bharat (Self-reliant India), but much essence of this intends to implement failed experiments. The several relief packages announced were credit-oriented, such as loan moratorium, interest waiver and so on, to provide temporary relief to those suffering from loss of jobs/job orders due to the lockdown. What was badly needed was direct budgetary support for the economy.

Lately, inflation has been rising. The rural–urban combined consumer price index based inflation rate stood at 7.3% in September 2020 and 7.6% in October 2020, thus breaching the upper limit of 6% of the Reserve Bank of India. The consumer food price index increased by 10.7% in September and 11.1% in October 2020. This leaves little space for more intervention by the central bank.

The global economy is still trailing. Fiscal space should, therefore, be utilised to hasten the recovery process. The centre could also step in to augment states’ spending by providing more grants. The lesser degree of contraction in Q2 compared to the preceding quarter cannot be seen as green shoots; the Indian economy deserves much more timely attention and an informed policy response to the crisis.

Leave a Comment