How to Jack Up Growth Rate

Is Covid history? Not yet. The nature and timeline of a vaccine isn’t certain, nor its efficacy. The last comparable instance of such a pandemic was the Spanish Flu (1918-1920). Subsequent research showed the Spanish Flu left longer-term adverse effects on human development outcomes (education, health, income). By the same token, we don’t yet know Covid’s longer-term legacy. Compared to alarmist numbers projected by some modellers in March 2020, India has handled Covid-19 reasonably well, regardless of the metric used to judge. However, active numbers are still high and concerns continue about testing and infections in some states (Punjab, Himachal, Rajasthan, Chhattisgarh, Gujarat and Haryana).

The point is that though there has been a process of un-lockdown since June, it is not as if the economy has been completely opened up. The Oxford COVID-19 Government Response Tracker (OxCGRT) seeks to do the near-impossible and measures a government response stringency index (with a value from 0 to 100) across countries: ‘This is a composite measure based on nine response indicators including school closures, workplace closures, and travel bans.’ On January 22nd, India’s index value was at 0. That is, there were no restrictions. From March 25th to April 19th, the value of the index was 100, reflecting the tough lockdown. The lockdown has the Union Government, state government and local body levels. The pedantic debate about whether the lockdown on March 25th was necessary is futile. Although a counterfactual, downside human costs were too high to risk. At that stage, any government that placed livelihood above lives would have been hauled over the coals.

On November 30th, the value of the index stood at 57.87, reflecting what we know anecdotally. There continue to be restrictions. If nothing else, all educational institutions would have opened otherwise. The nature of restrictions has moved from Union to local, to specific containment and micro-containment zones. Had we been socially more responsible, collectively as citizens, opening up might have been faster. (Witness Rajasthan imposing curfew in several districts, but permitting deviations for weddings.) While restrictions remain, an economy cannot return to normalcy. Economic revival cannot co-exist with constraints on economic activity. In the midst of this, Q2 national income figures have surfaced and these are for July to September, when there was still a lockdown (Un-lockdown 2.0 to 4.0 so to speak), though obviously less stringent than Q1 (April to June). Year-on-year, these Q2 numbers say: one, real GDP declined by 7.5 per cent; and two, expectedly, agriculture showed positive growth in Q2, but so did manufacturing (a surprise, though the increase is small) and so did electricity, gas, water and other utilities. Lurking in the background was a 23.9 per cent decline in real GDP in Q1 of 2020-2021. When that 23.9 per cent number surfaced, there were Cassandras who suggested gloom and doom. The first fact implies the gloom wasn’t as severe as was made out to be. The second implies the recovery is broad-based and isn’t driven by agriculture alone.

There is a quote misattributed to John Maynard Keynes, in the sense that there is no evidence Keynes ever said anything of the sort. Accused of being inconsistent, he reportedly said, “When the facts change, I change my mind. What do you do, sir?” The proposition is a simple one. Lockdown will understandably and inevitably lead to a livelihood and economic toll, as it has in other countries. A State Bank of India analysis of 49 countries for the July-September quarter shows an average decline of 12.4 per cent, compared to India’s 7.5 per cent. As lockdown eases, the economy will recover. This should be self-evident. Some realistic Cassandras have accordingly revised projections for Q3 and Q4 and for the full year, 2020-2021. A few have harped on India’s first recession since Independence. There are different definitions of recession.

The most common one is that GDP declines for two successive quarters. So yes, India has gone through a technical recession, as have other countries. However, pre-1996, quarterly GDP numbers didn’t exist for India. Therefore, ‘first recession since Independence’ amounts to being economical with the truth. For instance, India’s GDP had declined by 2.7 per cent in 1965-1966 and by 5.1 per cent in 1979-1980. Had quarterly GDP numbers existed, India couldn’t but have gone through a technical recession then.

What does this mean for Q3 and Q4 and 2020-2021 as a whole? Nominal growth is real growth plus inflation. For Q3, it is reasonable to expect positive nominal growth, unless you are a diehard Cassandra who believes Q2 numbers reflect pent-up demand and nothing more. Since restraints of various types are still in place, expecting positive real growth in Q3 might be expecting too much. We will know at the end of February 2021. But in Q4, both real and nominal growth should be positive. We will know at the end of May 2021. For the entire year, a die-hard Cassandra might expect a real GDP decline of more than 10 per cent. I am inclined to think the actual decline will not be more than 7 per cent. Lower the base in 2020-2021, the higher the growth in 2021-2022, since growth rates are a function of whatever happened at that precise point one year ago. If one is only focused on growth rates, real or nominal, 2021-2022 will thus be a mirror image of 2020-2021. The sharper the decline in 2020-2021, the more spectacular the recovery in 2021-2022, at least in terms of growth rates and real growth of 10 per cent or more in 2021-2022, is a near certainty. However, a better way of looking at what has happened is not growth rates but levels of economic activity. From the point of view of aspirations and development, 2020-2021 and 2021-2022 represent two wasted years, triggered by unfortunate and external factors. 2021-2022 only compensates for what 2020-2021 has lost. In April 2022, we will be roughly where we were in March 2020. That is what I meant by two wasted years.

Three questions become important. First, who has borne (will bear) the brunt of the economic consequences of Covid? I don’t mean obvious sectoral angles like hospitality, travel or civil aviation. If India has weathered the storm better, that’s because of the Government’s initiatives in the rural sector since 2014, not merely because the rural sector was relatively untouched by lockdown. There is that clichéd metaphor of a half-empty and half-full glass. The appearance of the same glass depends on one’s eye-level. That determines the perspective. When the glass is placed above one’s eye-level, it will appear more full than empty. When the glass is placed below one’s eye-level, it will appear more empty than full. This extended metaphor may explain different reactions to the question of loss, rural versus urban. The entire loss cannot be borne by government and has been borne disproportionately by informal urban labour markets and micro, small and medium enterprises (MSMEs), not so much by formal labour or corporate enterprise. (From that point of view, Q2 numbers of construction, trade, transport and communications are extremely significant, since, compared to Q1, the decline is much more muted.)

Second, what drives growth from 2022-2023? The state of the global economy is uncertain. While uncertainty, protectionism and trade frictions pre-date Covid, the pandemic has aggravated matters. Therefore, net exports cannot be a major driver of growth, leaving one with consumption, private investments and government expenditure. Government expenditure is limited by fiscal considerations, though that’s a function of nominal GDP growth, which determines government ability to repay debt. In Q2, the rate of gross fixed capital formation (the investment rate) was 29.0 per cent, compared to 22.3 per cent in Q1 and 28.9 per cent in Q2 of 2019-2020. While it is still early days, this suggests investment activity is recovering, facilitated by various supply-side measures designed to improve the investment climate, such as land, labour and capital market reforms. However, as with government expenditure, there is also the question of efficiency of expenditure and capital, too, can be used far more productively, underlying the need for more capital market reforms and turning non-productive liabilities into productive assets.

Third, beyond 2022-2023, what kind of growth can one aspire to? In passing, growth had slowed before Covid. Though rarely mentioned explicitly, some of that slowing was undoubtedly due to the cleaning-up of the system. This isn’t merely about achieving a $5 trillion target by 2024-2025. To start with, that was aspirational and is now impossible to achieve by that deadline. Sooner or later, India will get there, with the timeline having moved further by two or three years. Depending on assumptions made about inflation and exchange rates, getting to that target would have required real growth of about 8.5 per cent. Real growth of 7 per cent is required to make a dent on poverty and unemployment and ensure government debt remains within manageable limits. The baseline, from 2022-2023, is of about 5.5 per cent. Hence, there is a different way of asking that question. Have the supply-side reforms introduced imparted sufficient efficiency into the system to jack up growth rates from 5.5 per cent to 7 per cent and more, not overnight, but over a couple of years? There is enough endogenous slack for that to be possible and a lot depends on the states, not the Union Government.

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