Economy on a tailspin

By K R Sudhaman

Economy on a tailspin

The severe contraction of the Indian economy in the first quarter of 2020-21
at 23.9 percent, though on expected lines in the face to total lockdown in
April-May is certainly a wake-up call for the government to carry forward
major structural economic reforms to quickly revive and get back to high
growth path.

Analysts have already forecast that growth in the rural and agricultural
the economy will not be sufficient to compensate for the decline in urban demand
and estimated the FY21 GDP contraction could be anything between 5 and 12
percent if all goes well in the remaining period of the year and that there is no
a fresh outburst of coronavirus needing severe lockdown again.

Former finance minister P Chidambaram said of the world’s major and
advanced economies, India’s economy declined more than any other country’s
except for the economy of the United States. “What does that tell us? That Mr
Modi stands second only to Mr. Trump in terms of incompetent economic

The quantum of negative growth shows the impact of lockdown has been way
higher than anticipated, rating agencies say but the Industry however feels
that deep contraction in GDP is on expected line and that the recovery will be

The industry says the steep 23.9 percent contraction in the GDP in April-June
reflected the “stalling of economic activities” due to the lockdown imposed in
response to the coronavirus pandemic. However, it anticipates the economy to
stage a gradual recovery in the coming quarters on account of reforms, the Rs
20 lakh crore stimulus package and measures are taken by the Reserve Bank

The economy badly tanked in April, when there was a complete lockdown.
Even the agriculture sector, which works out in the open and could have
continued normally, was adversely impacted due to the collapse in demand and
freezing of trade and transportation. Arrivals in North Indian Mandis were
half of what they were in April 2019. Floriculture, horticulture, vegetables,
poultry, and milk are some of the commodities which suffered. Though the
rabi crop was a record, agriculture production as a whole would have risen
little in April-May.

Production of essentials was permitted during the lockdown, but fast-
moving consumer goods (FMCG) firms faced a decline. Most people could not

go to work, so roads were empty and offices and factories were shut.
Government offices were also closed and only the essential administration
and police were functional. In fact, the economy would have been working at
less than 25% of its level in April 2019. Still, the economy is not working at
more than 60%. If the miserable plight of unorganized is not fully captured
and had it been the case, contraction could have been steeper.


But what is more worrying is that apart from the sharp decline in quarterly
growth due to lockdown is that Indian economic growth has been steadily
declining since 2016. According to former Chief economic advisor and World
Bank chief economist Kaushik Basu these are warning bells that all is not
well with the economy and if quick remedial measures are not taken, India
will miss the bus to get back to high growth path and the economic
the development will be pushed back by years.


The reason for slowing economic growth since 2016 is demonetization and
unfortunately, the unorganized sector decline is not captured in the GDP data.
It is not captured in annual and quarterly GDP data. Agriculture is the only
component of the unorganized sector whose data is used. The unorganized
sector is 94% of employment and 45% of the output of the economy.

India has become the worst-performing economy among the G20 nations in
April to June quarter. Britain is the next worst at -20.4% and China is the
best performing with a positive rate of growth of 3.2%. Within one quarter,
China turned around from -6.8% to a positive rate of growth.
Analysts say the reason for this is that lockdown was not properly


Also, there is a very large unorganized sector, unlike other big economies. People in this sector are poor and cannot cope with a crisis. The authorities have ignored this factor.
As a way forward, former India’s chief statistician and economist Pronab Sen
feels that the government needed to step up its own expenditure. Expecting
people to draw down their savings indefinitely won’t be enough as much of
the poor and middle class may have already wiped out their savings.


The government can borrow from the market or the Reserve Bank. “I don’t
understand their reluctance to do so. Is the government willing to let the
economy go down the tube because they want to shore up their fiscal deficit
numbers?” he asked. He expects a 10%-12% contraction in annual GDP,
although he feels that the last quarter of the year may show some modest

The Ministry of Commerce and Industry also released data recently on the
eight core infrastructure sectors showing that output contracted for a fifth
straight month in July, with the 9.6% decline driven by a fall in production in
the steel, cement, and refinery products industries. The Chief Economic
Advisor Krishnamurthy Subramanian pointed to the core sector data as one
indicator of a “V-shaped recovery”, as it has eased since the 38% contraction
in April.

“If you look at railway freight traffic, which is often times a good indicator of
economic activity, in July, it is 95% of the level that it was last year. In fact, in
the first 26 days of August, it is 6% higher than the same period last year.
Power consumption is only 1.9% lower than last year. E-way bills in August,
which capture inter-State trade, are at 99.8%, almost the same as last year,
despite the presence of some local lockdowns. So overall, there is a V-shaped
recovery. We should expect a better performance in the subsequent quarters,”
he says, adding that the GDP contraction should be put in the context of a
global recession due to COVID-19.

Former RBI Governor Raghuram Rajan however had a different take. He is
right in saying the government needed to come out with big stimulus packages
particularly to push demand as GDP numbers clearly ring alarm bells.

The government’s plan to conserve resources for a future stimulus is self-defeating. India needs relief now.
Rajan too is of the view that 23.9 percent contraction of GDP in the first
quarter of 2020-21 will probably be worse when estimate of the damage to
the informal sector is available. This contraction is in sharp contrast to the
drop of 12.4 percent in Italy and 9.5 percent in the US, two of the most COVID
affected advanced economies. (Economy on a tailspin)

Besides the pandemic is still raging in India so discretionary spending
especially on high contact services like restaurants and the associated
employment will stay low until the virus is contained.
India needs strong growth and the recent pick up in sectors like autos is now
evidence of the much-awaited V-shaped recovery, Rajan says in an article
adding that to improve competitiveness, long-debated reforms to land
acquisition, labor, power, and the financial sector should be implemented, as
should recently announce reforms in agriculture.

Economy on a tailspin/Economy on a tailspin/Economy on a tailspin


(Mr.  K R Sudhaman is a noted journalist and columnist)  



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