Q1 GDP shrinks | How long will the free fall last?
The economy’s revival will critically depend on people’s ability and confidence to spend, both of which are at awfully low levels currently
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What happens when factories are abruptly shuttered down? What happens when the people stop eating out? What happens when road and infrastructure projects come to a crushing standstill? What happens when property construction sites are vacated for an uncertain period of time? What happens when shops shut abruptly for long periods? What happens when export orders hurriedly get cancelled or dry out?
The answer is a no-brainer: The economy will shrink. This postulate shows up perfectly in the national income data released on August 31.
Gross domestic product (GDP) — the total value of goods and services produced in the country — fell 23.9 percent in April-June 2020, the worst in India’s statistical history, a data set that was not entirely unexpected. The deliberation was only over the extent.
The extent is now clear, and official. From manufacturing to mining, from construction to real estate, from hospitality to trade, the lockdown has spared none.
The bigger question now is: How long will the impact last? Will it last for months or for years, if social distancing measures need to be kept in place for protracted periods?
Will the economy see multiple peaks and troughs in the number of cases and losses of output, spanning several years? By when will the economy return to its pre-outbreak levels?
A V-shaped recovery is the best-case scenario that everyone is hoping for. This happens when the economy rockets back as quickly as it had fallen, aided by a government stimulus that pushes up demand.
Income and output rises, demand grows and higher spending by households prompt companies to add capacity lines and hire more. Not many economists, though, are predicting a V-shaped rebound this time around, given COVID-19’s pervasive spread and the lockdowns’ biting impact on the broader economy.
An L-shaped slide, sometimes described as the ‘hockey stick’ slump, appears more likely, although policymakers would desperately want to avoid such a state, which comes about when the growth nosedives and stays down for a long, long time.
India has never recorded a drop in real GDP growth since 1979. There have been four ‘negative growth’ periods in India since Independence: late 1950s, 1965 (-2.6 percent), 1972 (-0.5 percent) and 1979 (-5.23 percent). COVID-19 could well push India into full-blown recession for the first time in 40 years into an L-shaped scenario.
One of the surest ways to revive the Indian economy, or any economy for that matter, is make people spend more. Unlike China, the edifice of India’s growth has been the vast consuming households.
While the middle class spending is widely evident through visible items such as cars and consumer durables, it is the not-so-well-heeled that actually keeps India’s consumption cycle thriving.
An economy-wide squeeze have made those at the lowest income scale, such as migrant daily wagers and street vendors, most vulnerable. These are the class of people that need immediate hand-holding.
The collapsing purchasing power of this class has shown up in GDP numbers. Private final consumption expenditure (PFCE) — the best available proxy to measure household spending in India — has fallen 26.7 percent during April-June 2020 (at constant prices), compared to the same period last year, buttressing the importance of greater everyday spending to engineer a quicker rebound in the broader economy.
Of India’s workforce, 90 percent is in the informal sector, millions of whom have migrated from their villages in search of a better living. In terms of sheer numbers, these inter-state migrants make up for a colossal magnitude, underlining their importance in India’s economic structure.
The Indian Railways ferried an estimated 9 million migrant labourers through its special services — Shramik Special trains — from various cities to their respective states during the lockdown.
The migrant worker population has spawned a domestic remittances market, estimated to exceed Rs 1.5 lakh-crore annually. Effectively, this implies that migrants working in urban areas are sending money back to their families in villages worth nearly two-and-half-times last year’s annual MGNREGA budget.
These money transfers, from migrant labourers to villages, serve 10 percent of households in rural India, and finance over 30 percent of household consumption in remittance-receiving households, buttressing the importance of urban growth for rural families.
Therefore, an out-of-work migrant worker not just brings down their own income, but also, at a macro level, worsens prospects of in the rural economy, as it brings down their ability to send money home.
The scenario is clear: The economy’s revival will critically depend on people’s ability and confidence to spend, both of which are at awfully low levels currently.
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