Vijay Kumar Gaba

The economic growth in first quarter of current fiscal year (FY21) contracted ~24% as compared to 1QFY20. The data released on Monday evening was not shocking as this quarter was impacted by the total lockdown of economy to mitigate the impact of COVID-19 pandemic. However, it was surprising to the extent that it surpassed all the worst case estimates and is the worst economic performance amongst all major global economies.

The sharp economic contraction has come after a sustained economic slowdown over past four years. The investment activity and new employment creation has virtually collapsed in post demonetization (November 2016) period. The household savings, which traditionally cushioned the fiscal profligacy of governments, have declined sharply and rate of incremental rise in per capita income has also declined. The wealth and income inequalities have seen sharp rise causing widespread civic disquiet in the country. The stress on financial sector is not easing materially despite a number of measures taken to this end.

To me the data is worrisome on many counts. For example—

(a)   The lockdown is being gradually lifted in the second quarter of FY21. However, there is no indication of a complete unlocking in next few months at least. This implies that the growth data for 2QFY21 will also be sharply negative, and the growth data for the whole year may be in the range of -10% to -12%, depending upon how the agriculture and public sectors perform in next 7 months. The long term growth trend (5yr CAGR of Real GDP) would be below 3% till FY24 at least. The long term growth trend is more critical in my view, because it takes 3-5years for the high growth to percolate down to the lower middle class and poor people. The rising long term growth trend during FY03 to FY08 sustained the higher growth and prosperity of people for next 7-8years, despite global crisis and falling annual growth rate. Conversely, the low long term growth rate hits the bottom of the pyramid almost immediately.

 

(b)   The government seems to be in denial mode still. The economic manager of the government like Chief Economic Advisor of PM, Principal Economic Advisor of FM, Finance Minister, Commerce Minister et al, are still talking about a "V" shaped recovery, refusing to accept the broken supply chains and diminishing demand.

The suggestions like make toys and export Kohlapuri chappals sound totally incongruent. Indian manufacturers have not invented any toys or video games since Indus Valley civilization. Our traditional toys made of earth and wood are all inspired by the ancient toys; while the modern (even soft toys) toys are all poor copies of the "imported" toys. Building capacities that can produce modern toys at rates competitive to Chinese imports would need massive investment. Is it desirable to do so, when the trend is moving towards digital games?

The Kohlapuri chappal trade is facing multiple problems due to issues with bovine leather availability. The minister wants $1bn worth of annual exports of Kohlapuri chappals; which comes to ~2lac pair of chappals every day (assuming average price of $15/per pair). A tough ask by any standard! (see here)

The vision and experience needed to accelerate growth while facing the challenges of sustainability, survival, equity, capital scarcity, fiscal discipline, etc is certainly lacking. And that is worrisome.

(c)    The growth has been on the decline for past 4years now. Notwithstanding the claims made by the government and political parties, we have not seen much progress on socio-economic equity aspect. However, no one has accepted accountability for the inadequate and misdirected policy response. This lack of accountability is in a democracy is also worrisome.

(d)   The federal structure of the country has got severely damaged in past few years due to rise in mistrust between the ruling and opposition parties. Under these circumstances, forming consensus on any issue of national importance appears difficult. This is worrisome.

(e)    The rising incidence of unemployment and unemployability amongst youth is leading to rise in instances of crimes like theft, looting, kidnapping for ransom, mugging and even rapes etc. This restricts the mobility of people, especially women, having serious economic implications. This is worrisome.