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Wednesday, September 23, 2020

Not prepared for the worst

COVID-19 shock and inadequate policy responses have compounded India’s economic problems.

New Delhi | Updated: September 2, 2020 6:22:46 pm
Not prepared for the worstThe actual contraction is likely to be significantly larger than the reported value of -23.9 per cent. (File)

Written by Deepankar Basu

It was widely expected that the COVID-19 lockdown in India, one of the most stringent in the world, would have a serious negative impact on economic activity. But the actual contraction in real GDP in the first quarter (April-June) of 2020-21 exceeded the most dire forecast.

Data released by the Ministry of Statistics and Programme Implementation of the Government of India on August 31 showed that real GDP had contracted by 23.9 per cent from its value in the first quarter of 2019. This is the sharpest contraction in economic activity ever recorded by the Indian economy since it started publishing quarterly GDP data in 1996.

The actual contraction is likely to be significantly larger than the reported value of -23.9 per cent. The pandemic has not only impacted economic activity, it has also made data collection about economic activities much more difficult. Therefore, government statisticians have had to improvise, to use substitutions for usual data sources, and to rely on “interactions with professional bodies” to generate the GDP numbers.

Such improvisations are likely to have a relatively larger impact on data collection about the unorganised sector, which accounts for a significant part of the macroeconomy (by some estimates, about 45 per cent of GDP and 93 per cent of employment). Even in the best of times, it is a challenge to provide good estimates of value added in the unorganised sector. The pandemic would have increased problems of data collection for this segment of the economy. Since the pandemic has adversely affected the unorganised sector disproportionately more than the organised sector, the reported contraction of India’s GDP is likely to be an underestimate.

Also read | India’s GDP growth contracts 23.9%: What is the economics behind the math?

Compared to other major economies of the world, the contraction of economic activity in India between April-June 2019 and April-June 2020 has been the sharpest (figure 1). While all countries shown in figure 1, other than China, saw a contraction of aggregate economic activity, the decline of the real GDP in India is the largest. Spain (-22.1 per cent) and the United Kingdom (-21.7 per cent) are the only two countries which witnessed real GDP declines of more than 20 per cent.

Change (%) in quarterly real gross domestic product between April-June 2019 and April-June 2020. Source: Eurostat and Government of India.

What is surprising, and should worry Indian policymakers, is that the lockdown, while engineering the sharpest contraction in economic activity in recent decades, has not managed to halt the spread of the pandemic. Daily reported COVID-19 cases and deaths have been steadily rising in India over the past several months.

On July 28, India’s daily reported COVID-19 cases crossed Brazil’s to become the second highest in the world. On August 8, India crossed the United States to become the country with the largest number of daily reported COVID-19 cases in the world. India’s upward trajectory in terms of the daily reported COVID-19 cases continues unaltered.

On September 1, the seven-day moving average of daily reported COVID-19 cases in India was 74,835 — the highest in the world. The second and third-highest were the United States and Brazil at 41,443 and 40,773, respectively, far behind India.

High case counts have gradually accumulated to high deaths too. On August 27, India became the country with the highest daily reported COVID-19 deaths in the world. On September 1, the latest day for which data is available, the seven-day moving average of daily reported COVID-19 deaths in the three top countries in the world were 977 (India), 903 (USA) and 867 (Brazil), respectively.

As the COVID-19 pandemic hit the country in March, it was clear that the Indian government would need to simultaneously act on two fronts: Control the spread of the pandemic and cushion the impact of pandemic measures on the economy. Public health experts had warned that the health crisis and the economic crisis fed on each other. One could not deal with one crisis adequately without dealing with the other crisis effectively.

Daily confirmed COVID-19 cases (7-day moving average). Source: Our World in Data.

The bleak data on the economy and the seemingly runaway COVID-19 pandemic (figure 2) point to serious shortcomings about the Indian government’s response. A combination of inadequate public health interventions (to deal with the pandemic) and insufficient fiscal stimulus (to cushion the adverse impact of the lockdown) has caused enormous suffering to the common people of India.

(The writer is Associate Professor, Department of Economics, University of Massachusetts Amherst)

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