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Thursday, January 21, 2021

Can the Modi government script a comeback and revive the economy?

India’s Gross Domestic Product saw a sharp decline in the first financial quarter of 2020. It shrunk by 23.9 per cent this quarter. But this decline is not at all surprising. Rather it might not really show the real picture. But can the Modi government script a comeback and revive the economy that has been in the slump not just post-COVID but since long before that.

A lion’s share of the humungous fall in GDP can be attributed to the lockdown. Dubbed the most stringent and strict lockdown in the entire world, India saw most of its economic activities suspended from March through April. Since no one but those working essential services were allowed to even step out of their homes, the economy took a huge hit. Everything stalled including the agricultural sector which is still the backbone of India’s economy. The agricultural sector had the option of working because most of its functions are performed in the open air and it is easy to follow social distancing norms but there was no demand, no proper trade or transportation. Without these basic support features, the agricultural sector tanked as well. The economy was operating at one-fourth of its normal capacity. Here started the downfall of the Indian economy which was already in a bad state.

The month of May saw the commencement of the phased relaxations that were announced in stages. But this too did not really make a difference at one go. While deliveries from e-commerce websites were opened in some zones, this did not really help the majority of the economy which saw a constant decline in labour-intensive sectors like construction and manufacturing. But May could not have been working at more than 40 per cent of its normal capacity. June saw the first Unlock phase. while other sectors gradually opened up, the services sector was not allowed to open up.

 

The GDP decline

The 23.9 per cent decline in GDP growth is actually less than what the actual number is. Why? Because the GDP does not consider a major part of the economy. The unorganised sector in this country has no account — not in the economy, not in the employment data or in the taxes collected. This has convenient for governments over the ages. Whenever there is a drop in employment and the economy they point the people towards the unorganised informal sector. But this time the unorganised sector is the one that has been affected the most and what was supposed to be around a 47 per cent drop in GDP has merely been 23.9 per cent in the NSO records. Another reason for the not-so-high decline is the decrease in imports and increased government expenditure in the form of economic support to the country.

But do we really know what GDP actually is and how it shows us the state of the economy? GDP or Gross Domestic Product is the value of all the goods and services that have been produced within the physical boundary of the country in a specific period. Here the specific period being a financial year or a quarter depending on when and how you calculate it.

 

What will the government do?

These are extraordinary times which comes once in a century, the government has said this over and over again. The Chief Economic Adviser has also said that the slump that the Indian economy is in, to nothing but “exogenous factors” like the COVID-19 and the ensuing sector.

Our Union Finance Minister Nirmala Sitharaman who is known for her controversial comments more than her budgets had put the blame of India’s current economic slump on something no one can touch — she called it “an act of god”.

Act of God or not, India is headed for a full-year contraction in 2020 and this will be the first time the country will see this bad a slump in 40 years since 1980. But like the Prime Minister himself said, these times can be seen as a time of opportunity and the Modi government does have an opportunity to revive the economy back to health and on track for the $5 trillion aim. But for that, there needs to be an increase in demand. Though the Finance Ministry had announced an economic stimulus at the early stages of the COVID attack on India and the following lockdown, it has fallen short.

“GDP figures released today are as low as 4.5 per cent. This is clearly unacceptable. Aspiration of our country is to grow at 8-9 per cent. The sharp decline in GDP from 5 per cent in Q1 to 4.5 per cent in Q2 is worrisome. Mere changes in economic policies will not help revive the economy,” Former Prime Minister Manmohan Singh said. He added that the state of the Indian economy is deeply worrying but the state of Indian society is even more worrisome. “We need to change the current climate in our society from one of fear to one of confidence for our economy to start growing at 8 per cent per annum. State of the economy is a reflection of the state of its society. Our social fabric of trust and confidence is now torn and ruptured,” Singh said.

 

How Aatmanirbhar?

The government needs to revive the demand which will, in turn, increase the supply and attract labour back to the cities. At this pint, even if the labourers come back to the urban areas they will hardly find any work. Thus the reverse migration issue will not be solved. There needs to be government investment in both the public and private sectors to nurse the economy back to health. There has been a Rs 14 lakh crore drop in consumption and investment in the first three months.

Modi’s Aatmanirbhar Bharat dream will only be fulfilled if his government nudges the country towards a higher demand. Even before the COVID-19 the economy was in a bad state and needed the government’s help. But the government itself had no funds to start with and the borrowings were more than the country could afford. Now with countries like Japan extending financial help, there might be a way out.

 

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