Consumption and Investment would remain low ahead of a possible third wave, says Prof Arun Kumar

Indian economy was on a declining trend even before the first wave. Demonetization and faulty implementation of the GST had hampered the growth of our economy. Consumer behavior was changing because of demonetisation. It further declined during the first wave and second wave. The confidence of the investors was also low during these periods. Negative growth of GDP during 2020-21 is alarming and the government has to take some corrective measures before it is too late.

Economists have raised question on the reliability of the figure given by the government. But even then -7.3 GDP growth is a matter of serious concern and the government and economist should try to find the way forward from here to meet the challenges ahead of a possible third wave. After the first wave, when the economy was on the threshold of a recovery, the second wave damaged the positivity as many believe.

On the negative GDP growth in 2020-21, Prof Arun Kumar, noted Economist of India said, “Mostly the figures announced are quarterly and we also have advance estimate of the year 2020-21. The data generally available are from the organised sectors and they are the basis of the predictions made. But for agriculture, data from the unorganised sectors is not available and it is assumed that it is growing at the same rate as the organized sector which is incorrect because the former has declined much more sharply than the latter during lockdown. Based on this flawed methodology, the government has given the rate of growth of GDP as -7.3% and the rate of growth in Q4 as 1.6 percent. In the case of agriculture too, in Q1, it was said that the production target was achieved. We all know the production of fruits and vegetables was down in Q1 because it rotted in the fields. Milk production was low and poultry and flowers were also badly affected. These segments constitute 50 percent of agriculture production. So, in Q1 when growth in agriculture was taken to be 3 percent, there was a 10 percent decline.”

He added, “If we take data from both organised and unorganised sectors then the figure would be -29 percent and not -7.3 percent. The figure of 1.6 percent growth in Q4 is also doubtful because in January 2021 capacity utilisation of organised sector was down by 10 percent compared to 2020, as per the RBI. Capacity utilisation was 63 percent but a year earlier it was around 70 percent. In the government press note, for each of the quarters of 2021, it is admitted that data from many sectors were not available and therefore they have taken alternate figures and therefore the growth figures could be revised later on.” “In Q1 most data was not available. Hence the Q1 and Q2 data are not comparable with last year’s data or this year’s data. So, the question arises how reliable are the figures given by the government. As a result our data on growth is very doubtful. They are showing a better picture than the situation on the ground. This is especially true for the unorganised sectors,” said Kumar.

On the possible reason behind negative growth, Prof Kumar said, “The negative growth no doubt was because of the pandemic because there was lock-down and production of goods and services was badly affected. But the impact of the pandemic could have been minimised if the policy of the government was in accordance to the situation. The government should have transferred money to those who had lost incomes to increase their purchasing power which would have increased demand and that would have resulted in more production. The government should have pumped enough money into the Rural Employment Guarantee Scheme and into micro units to revive them. If they had adopted such policies then the decline would have been much less. The government’s package last year was based on supply side policies and not on boosting demand. When demand is low the former cannot work since investment would not kick in.”

On the consumer behavior ahead of third wave if it materializes, he said, “The consumer sentiment was already down in January 2021, as per the RBI data and it has fallen further. Capacity utilisation was also down and it has also declined further. As you said, there is a possibility of a third wave and it is being said that its impact would be more on children. So, many people are frightened and therefore they will not increase their consumption any time soon. If there consumption remains low then demand will also remain low and investment will not revive. So, consumption and investment would remain low ahead of a possible third wave.”

On the contraction of the Indian economy by over 7 percent, Dr. Sankarshan Basu, Professor of Finance at the Indian Institute of Management Bangalore said, “The contraction of the Indian economy by over 7% in the last fiscal (2020 – 2021) is obviously significantly due to the global pandemic caused by Covid 19. But it will be wrong to assign the entire cause to Covid 19. It is now well known that the Indian economy was on a downward trajectory even before Covid 19 appeared on the world stage. Yes Covid 19 accelerated the contraction and made it sharper than it probably otherwise would have been. There were enough issues in the Indian economy starting from Demonetization and the imperfect implementation of GST (please note that GST as an idea and process is very good – it is the implementation and fragmentation in to multiple slabs that is the problem) and the reluctance of the policy makers to really acknowledge the same were causing to hurt the economy.”

Basu added, “The way forward, at this point, seems to be enhanced consumer spending. But then the consumers really are cash strapped due to the pandemic. Thus, the government should resort to measures to increase cash in the hands of the consumers – it has to be a mixture of tax cut (wherever applicable) as well as printing money (quantitative easing) and do a Direct Benefit Transfer to the bottom 10% - 15% of the society. This will help increase demand and allow the economy to revive. The downside of this is ballooning fiscal deficit but in my mind a few years of additional fiscal deficit would be worth it and once the economy is back on track and showing sustained positive growth, fiscal discipline can be reinformed.”

Akram Hoque, Founder Editor of The Policy Times has also worked as Sr. Assistant Director in the Multilateral & International Policy and Strategy Division at FICCI, and also worked with Confederation of Indian Industry (CII) while sharing his perspective on the reason behind negative growth and the way forward said, “Reasons are many - 1. Sudden disrupt in global trade due to Covid-19 Pandemic. 2. India's good schemes but poor and implementation failures led to fall in helping industry. 3. India has world's largest informal sector and Government is absolutely disconnected with the informal sector labour forces and making the scheme benefits to reach them. 4. GST became biggest hurdle especially for healthcare sector and fighting Covid-19. Given India's proactive approach, economy is likely to recover in 2023. With India’s unparalleled image and investor friendly we may recover quickly. But India needs to give enough focus and support to the informal sector.”