Henry Ford, the founder of the Ford Motor Company, once said, “When everything seems to be going against you, remember that the airplane takes off against the wind, not with the wind.”
In March, when countries like the USA, Sweden, Mexico, and the like were majorly focusing on the economic implications of Covid19 regardless of the large number of deaths due to the pandemic, India with around 22% population living below the poverty line (Census 2011) was chanting the mantra of ‘Health is Wealth’ and thereby imposed one of the most stringent lockdowns in the world to safeguard the lives of the people. Currently, while India has already crossed the 5 million mark of the number of corona cases and is on the track to surpass the USA, the worst affected country by Covid19, its economy is in shambles at the same time.
The data released by the ‘Ministry of Statistics and Program Implementation’ of the Government of India on August 31, 2020, showed that the real GDP for the first quarter (April- June) of 2020-21 had contracted by 23.9% from its value in the first quarter of 2019. It was anticipated that lockdown would have a severe negative impact on the overall economy, but this data surpassed the most dire forecast. The figures record the sharpest contraction and the first-ever instance of negative growth by the Indian Economy since the country started publishing quarterly GDP data since 1996.
However, these data may well be undervaluing the degree of the shock and the actual contraction is likely to be significantly larger than the reported value of -23.9%. The reason being the estimates rely largely on the listed corporate sector data and don’t accurately capture the informal sector of the economy which accounts for a substantial part of the macro-economy (93 percent of the total workforce tentatively, Economic Survey released in 2019).
The agriculture and the allied activities sector which was excluded from the lockdown restrictions grew by 3.4% and was the only flicker of light in the first quarter. Except for this sector, value added by all the other sectors in the economy witnessed a contraction emphasizing how bleak the scenario is. While the construction activities plunged by a shocking 50.3%, the manufacturing sector for which the Government of India was aiming to increase the GDP share to 25% by 2022 had been collapsed by 39.3% in the latest results. Also, the service sector which includes trade, transport, hotels, and communication declined by 47% and private final consumption expenditure fell to 54.3% against 56.4% growth in the same quarter a year ago. The investment activity declined by 47.1% and factors like insecurity over jobs and income prospects are forcing people to save more and is likely to continue to weigh down household spending. The government consumption expenditure perhaps the only engine of growth in the current scenario grew by a healthy 16.9%.
While India’s Finance Minister Nirmala Sitharaman had blamed India’s exceptional economic slump on “an act of God”, the Chief Economic Advisor to the Government of India, Mr. Krishnamurthy Subramanian in one of his columns argued that “The GDP decline in the April-June quarter (Q1) is primarily due to the pandemic and does not relate to the economy’s performance leading into the pandemic.”
However, the data shared by the ‘Ministry of Statistics and Program Implementation’ reveals that the Indian GDP growth was already in a situation of slump and the lockdown only accelerated the downward curve. Since the economy was already sinking, it could not survive the ‘external shock’ of the pandemic. It would have absorbed some of the consequences of this pandemic, had it been resilient enough.
On the other hand, the former RBI Governor, Mr. Raghuram Rajan in one of his LinkedIn posts termed the situation as ‘alarming’. He further added, “Unfortunately, after an initial burst of activity, it seems to have retreated into a shell” and opined that the strategy of the government to conserve resources for a possible future stimulus is “self-defeating”.
Rajan explained the situation by putting an example- “If you think of the economy as a patient, relief is the sustenance the patient needs as of now” and emphasized on government spending.
But the question now arises: how can India overcome this crisis?
To stem the economic crisis of India, noted economists like Dr. Manmohan Singh, Raghuram Rajan, P Chidambaram, and Rathin Roy red-flagged certain issues and gave a few important suggestions to the government to reinstate normalcy which includes:
- The Government should increase its spending through MNREGA and direct cash transfer to the poorest households for their survival.
- The Government and public sector firms should clear their payables quickly so that liquidity moves to the corporations.
- Small firms below a certain size could be rebated from the Corporate Income and GST tax which they paid last year.
- The Government should invest in creating an infrastructure that will not only help in creating jobs but would also help in increasing the overall demands. The infra boost will also help the business in the future.
- India should focus on increasing exports and seek the help of the private sector to save small businesses.
- There is no harm to borrow more, for India is committed to returning to fiscal viability over the medium term.
- Recapitalizing the banks and encourage them to lend more.
- Slum Removal should be a priority for India.
- Spend 300-400% more on healthcare- both public and private.
- A fresh stimulus package should be provided to the middle class to increase their spending.
- The Government should make adequate capital available for businesses through government-backed credit guarantee programs and fix the financial sector through institutional autonomy and process.
While the pace of GDP contraction for the most affected G-20 country may well ease, the short-term prospects for India’s economy don’t appear to be favorable and hopes and expectations of a speedy recuperation to pre-COVID levels are likely to be shattered. However, parts of the economy have continued to improve sequentially in unlock phases but as the number of COVID cases are constantly rising coupled with the increase in unemployment and continuing localized lockdowns at some places, people may not be willing to spend much and the only best way a revival could happen is through the government spending.
The state of India’s economy is abysmal as of now and need every citizen’s support. Let’s hope that the government rolls out judicious economic measures. As a commoner, we can lend some micro-loan to a poor, support small businesses by placing orders to them or pay our maids in advance. It, nonetheless, is important to spend some money to help someone who is in need, since one person cannot make a difference but collective hands, Yes. Let us remind ourselves that in the hardest times we grow the most.
“Jo Saath De Saara India, To Jeet Jayega India”