Hope in Numbers

IF ANY PROOF of India’s economic resilience were needed, the quarterly output data released on August 31st provided that. In real terms, the Indian economy grew by 20.1 per cent in the first quarter of FY22. Last year, the same quarter witnessed a contraction of 24.4 per cent. There were other signs of a return to normalcy. Construction, a manpower intensive sector, grew by 68 per cent, manufacturing by 49.6 per cent and agriculture continued its robust performance at 4.5 per cent growth (all year-on-year comparisons).

These are signs that as vaccination proceeds, it is highly likely that India will be back on its feet by the end of the financial year and the next fiscal will witness a return to a higher growth trajectory. As of now, India’s GDP remains 5 per cent below its pre-pandemic level. For an economy that fell off the cliff when the pandemic started, these are encouraging numbers. The lesson from the first lockdown—mobility restrictions equal misery—has been fully imbibed. The second wave of the pandemic caused far less damage as the strategy for lockdowns was local in nature.

Perhaps the weakest link in the growth picture is that of private consumption. The 19.3 per cent growth in the April-June quarter gives the appearance of an impressive recovery. From a contraction of 11.2 per cent in the September 2020 quarter, it has steadily ticked up (a contraction of 2.8 per cent in the December quarter followed by 2.7 per cent growth in the March 2021 quarter, all year-on-year comparisons) till now. But the story is not that simple.

The quarterly data has been greeted with glee or gloom depending on the political perspective of analysts and commentators. Those inclined positively towards the Government see the 20.1 per cent real GDP growth as a story of India’s economic resilience. Those arrayed against the Government point to the weakening story of private consumption, the continuing weakness of the services sector and the far greater pain experienced by workers in the informal part of the economy. Both are partial appraisals of a much more complex reality.

Consider what goes in favour of the Government. India seems to have managed a smart recovery with minimal fiscal stimulation by the Government. (The heavy lifting was done by the Central bank that kept the credit taps open through the Covid-19 crisis). This happened despite predictions of gloom. The argument ran that unless the Government spent money on a stimulus package, the economy would continue to bleed and even if it recovered, the scars would remain for a long time. That drumbeat ignored the question: What should the Government spend money on? In a services-dominated economy, unless mobility was restored, money would only be saved and not spent. Savings data last year showed a huge jump in household savings. In the event, the Government did not act on this piece of advice and the economy began its slow crawl to normalcy from the second quarter of FY21.

Where the Government’s supporters go wrong is in assuming that there will be no costs beyond the output forgone during the period from March 2020 till now. The consumption data, when seen along with the Reserve Bank of India’s (RBI) Consumer Confidence Surveys (CCS), point to a disturbing possibility that consumption—the main engine of economic growth in India for long—may remain muted. The CCS has two indices. The Current Situations Index (CSI) measures response on the economic situation, income, spending, employment and price level for the current period compared with the past year. The Future Expectations Index (FEI) attempts to gauge future expectations, for the period one
year ahead.

The CSI has plumbed a historic depth of 48.6 in the survey that was carried out in late June and early July. This is the lowest level seen for the index. These results were released on August 6th. Similarly, the FEI remains in tepid territory. It has barely nudged up to 104 from 96.4 in the previous survey in May this year. A further breakdown of these results into their component parts shows respondents having a pessimistic outlook on virtually all aspects of India’s economic performance.

Consumption growth in a modern, services-driven economy is to a great extent an expectations game. If one thinks the future is bright, one spends in a carefree manner; if the future appears gloomy, one saves for a rainy day. Something similar is at work when it comes to inflation, where expectations play an important role in price dynamics. This has led most commentators to say that if the Government goes for a stimulus, consumption growth can be restored at both ends—at the level of workers in the informal sector who have borne the brunt of lockdowns through direct spending, and at the end of the middle class via expectations. To that extent, it is plausible to think that as movement and work get normalised, economic normalcy will be restored. The Government just needs to do a bit more and India can get back to its old, higher growth path.

Thoughtful economists have pointed out this may no longer be the case. Sajjid Chinoy, a member of the Economic Advisory Council to the Prime Minister, has argued that the consumption story began faltering way back in 2012. From that time, the disposable income/GDP ratio fell by two percentage points even as private consumption/GDP rose by four percentage points. Chinoy concludes this rise in consumption was fuelled by borrowing and debt. That has now run its course, especially since 2017-18 when the economy began to slow down. It goes without saying that with a huge population, an economy like India will see consumption growth; it’s just that it will not be a growth engine as before.

Chinoy argues that public investment and exports can plug the gap left by private consumption and private investment (which is largely dependent on private consumption and will not pick up further until there is robust demand growth). It is worth noting that the Government has stepped up public investment.

The Government’s unwillingness to spend on boosting private consumption—a demand that has been loudly championed by opinion writers and analysts alike—thus has a deeper reason. Last year, it was the lockdown-induced mobility freeze that made this strategy questionable, but there are clearly sound macroeconomic reasons for not pursuing a stimulus strategy. Instead, it has been argued that there is an ideological basis for the Government’s fiscal conservatism. That is only partially true.

Exports are the classic engine of growth in most emerging economies. It is heartening to note that exports grew by a whopping 39.1 per cent in the June quarter even if they were from a low base. Here, the benefit of robust global economic growth—the highest in many decades—is helping India. The danger is that, for many years now, India has displayed protectionist tendencies and export pessimism that is ideologically driven. The big lesson of the quarterly data is that India should not miss this opportunity and later attempt to get it back. These opportunities are lost if they are not seized on time. The last time there was an export boom that powered economic growth in developing countries, India pooh-poohed it. Hopefully, it will not make that mistake again.

Covid-19GDP growthIndian economylockdownpandemic