These aren’t “normal” times or even “normal abnormal” times. What we are going through can at best be characterised as “abnormal abnormal” times.
At the peak of the global financial crisis (GFC) in 2008-09, India grew at 3.1 per cent, a good 300 basis points faster than the world average — a speed differential it had maintained in the preceding decade. The COVID-19 pandemic struck at a time when India was growing at its slowest pace (4.2 per cent in 2019-20) since the GFC, crushing, at once, demand and economic activity. These blows have been compounded by unprecedented human misery, fears around safety, and a big reduction in incomes, visibility of income in the near future, and sources of livelihood.
We foresee a 25 per cent contraction in India’s GDP in the first quarter of the current financial year, and 5 per cent contraction for the entire fiscal year. While S&P Global foresees, on average, a 3 per cent permanent hit to GDP in the Asia-Pacific economies (excluding China and India) over the medium run, for India, we estimate the permanent loss at 10 per cent of GDP.
The problem is that the monetary measures announced after the pandemic do not have the heft to trigger a recovery because of rising financial sector stress and lack of fiscal space. Therefore, even as economic data of the past three months signals a move from “free fall” to “uneven improvement”, caution is in order.
The National Statistical Office released its estimate of the Index of Industrial Production (IIP) for April and May 2020 with the caveat that it must not be compared with previous data because the response rates to its surveys were low following the lockdown. The contraction would have been very deep in April because India possibly had “the most stringent nationwide lockdown in the world”. Also, in March, with only a few days of the lockdown being imposed, the IIP had contracted as much as 18 per cent.
The abnormal abnormality in the data collection process has meant that the proxies for traditional measures and real-time assessment of economic activity are finding favour globally. Last month, the economists Michael Spence and Chen Long noted that, “among the 19 countries and regions that have announced first-quarter GDP, we find that three-quarters of the variation in GDP growth can be explained by differences in mobility during this period”.
In India, too, analysts are relying on alternative sources of high-frequency data such as Google mobility indicators, goods and services tax collections, e-way bills, freight movement and power consumption to gauge the direction and quantum of economic activity. These show that large parts of the economy came to a halt in April, and were followed by uneven recovery till June. The Google mobility indicators show that grocery and pharmacy sectors have recovered the fastest, and retail and recreation the slowest. But, despite the improvements, all of them are below their pre-COVID levels.
So, how does the economic recovery look from here? To a large extent, it will depend on the shape the COVID-19 infection curve takes. Given India’s high population density and weak health infrastructure, the reliance so far has been on lockdown and social distancing. The longer the lockdown, the greater is the impact on livelihoods. That, in turn, necessitates income support for vulnerable households and financial support for susceptible businesses.
India has had little option but to open up the economy. That has led to some improvement in economic activity towards the latter part of the April-June quarter — but this is unlikely to sustain. In the July-September quarter, we expect the pace of improvement to slow down or even stagnate and fall in some cases. This is because of several reasons. First, some regions, where the spread has been faster, have reintroduced containment measures, which will adversely impact economic activity. Second, the partial unlocking of the economy and the back and forth on containment measures will continue to pose a hindrance to supply chains, transportation and logistics. Third, it will take time to restore normalcy in the services sector, particularly in hospitality, travel, sports and entertainment.
After two quarters of contraction, we foresee mild growth in the third quarter. But this is predicated on three things happening: The monsoon turning out to be normal, COVID infections peaking early in this quarter, and an additional fiscal stimulus of 1 per cent of GDP beyond what has been committed so far.
India’s inadequate fiscal stimulus is often contrasted with the largesse of the advanced countries, which are better positioned to spend their way out of the crisis. These countries have followed what the Nobel laureate Joseph Stiglitz calls a “fire-hose” approach to limit the economic fallout. So far, India has followed a calibrated approach, which does not lean much on direct fiscal spending, but comes with a dash of reforms.
There are risks to both approaches. The effectiveness of a generous stimulus is reduced by a rise in precautionary savings among households. Further, if there is a second wave, it raises the question of whether there will be enough fiscal ammunition left. The risk with India’s approach is that too little a stimulus can hurt the productive capacity of the economy and complicate the recovery process.
The interesting twist in the government’s economic package, though, has been the move on economic reforms, particularly in agriculture and mining, which aim to raise the “trend” rather than the “cyclical” rate of growth. These need to be relentlessly pursued, complemented by other reforms to improve the business environment. Only that can create an upside to medium-term growth prospects and over time, help trim the rise in the debt-to-GDP ratio expected this fiscal. This will also make it easier for India to go the extra mile on a fiscal push and pull out of the woods.
This article first appeared in the print edition on July 17, 2020 under the title ‘Mapping prospects and risks’. Joshi is chief economist CRISIL Ltd. Views are personal.
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