Indian Economy and Covid Recovery All Slow Down

The much-awaited GDP figures for India’s economy in the last quarter of the last financial year and for the full year are finally here. And while the immediate reaction seems to be one of relief, there is plenty to read between the lines.

For the last quarter of FY21, the Indian economy seems to have grown a measly 1.6% year on year, while for the full year, it has contracted by -7.3%. Since Covid-related lockdowns began only around end of March 2020, the last quarter of FY20 already saw growth at a low figure of 3.6%. This year too, Covid-related lockdowns began only in April, starting with Maharashtra, so economic activity should not have been affected very much in the last quarter of FY21. Yet, it has been.

If we look at the sectors for Q4 of FY21, almost all sectors saw growth, except mining and quarrying as well as the trade, travel and transportation segments of the services sector which suffered contraction. Understandably so, since industries linked to travel have been the worst hit by the pandemic. And even mining and travel and trade, which don’t account for such a large portion of our economy have contracted by only -5.7% and -2.3% respectively. Strictly speaking therefore, the Indian economy should have grown much faster.

Looking at it from yet another angle, that is the sequential recovery trend, we find that the Indian economy recovered from a -24% contraction in Q1 of FY21, to -7.5% in Q2, to growth of 0.5% in Q3 and then seems to have slowed down considerably to growth of merely 1.6% in the last quarter.

Given that private consumption is the main driver of growth in the Indian economy, it appears to have grown by a mere 2.66% in Q4 FY21 over the corresponding period of the previous year, according to my calculations based on reports on Ministry of Statistics and Programme Implementation’s website. What is even more shocking, or surprising at any rate, since the news was full of growing consumer demand during the latter half of last year especially during the festive season, is that the growth of 2.66% in Q4 of FY21 is the first actual growth in final private consumption for the entire financial year. During Q1, Q2, and Q3 of FY21, final private consumption actually shrank by -26.33%, -11.31% and -2.36% respectively according to the same set of numbers on the ministry’s website.

Strangely enough, government consumption expenditure during Q4 seems to have surged by 28.3% year on year and we don’t quite know what accounts for this.

I had written in an Owl Wisdom Podcast that even the pick-up we might have seen in consumer demand last year was perhaps only due to the festive season and some pent-up demand and that we need more relief measures that boost consumer demand. Some of that also reflects in the capital investment numbers. Gross fixed capital formation fell during FY21 by 10.78%, falling in the first two quarters and beginning to grow only from Q3 onwards. Capital investment in the last quarter of FY21 grew 10.85% over the corresponding period in the previous year.

This should be welcome news, as it not only means that the economy is on the mend, but that growing investment should create more employment and jobs as well. However, that doesn’t seem to be the case, either. After an improvement in unemployment numbers reported by CMIE for the worst affected months last year, the employment picture seems to have worsened once again. The latest unemployment figure (30-day moving average) according to CMIE is 12.4% as of June 3, 2021. And most of this is being attributed to recent Covid-related lockdowns as well as non-availability of labour.

Not only did the Indian government not do enough to boost consumer demand last year, we did not anticipate the second wave of Covid. On the contrary, positive news of rising sales of some products seems to have given the government the wrong impression that the Covid problem had been solved.

Not only is the Indian economic recovery slowing down, it is being ravaged by the second wave of Covid. It has caused untold misery in India’s cities and villages alike, but it is rural India that is now its epicentre. And since rural healthcare is paltry and non-existent in our country, we will never know the extent of the havoc it is wreaking in the hinterland. People in the villages of UP and Bihar seem to be dropping dead in fields and on riverbanks, according to news reporting by Barkha Dutt from the interiors of those states. There are reports of dead bodies floating in our rivers, including the Ganges.

Thinking we had overcome the pandemic the Indian government did not place enough orders for the vaccines domestically and internationally. This, while governments in the UK and US had started placing huge pre-orders in the summer of last year. If the Covid statistics in India are to be believed, the second wave seems to be waning now, but not before killing countless and causing misery to their families. That said, we can’t afford to relax because there is still the probability of a third wave, perhaps later this year.

The third wave will ravage rural India and the government had better have a clear strategy on tackling it, besides leaving it to the states. Leaving it to the states seems to be the only strategy the government at the centre has, and it has caused huge problems. At least on vaccines, procurement and distribution ought to be done by the centre. It’s also time we dropped the idea of differential pricing of the vaccines, depending upon the purchaser. Never heard of anything more ridiculous!

For the full financial year FY21, it is worth remembering that all sectors contracted, except agriculture which grew at 3.6% and utilities at 1.9%. If agriculture was the saviour of the Indian economy last year, don’t bet on it this time. With Covid raging across India’s villages, farmers will be under huge pressure of all kinds, and even with a good monsoon may not be able to deliver the goods. That is even more reason why the government needs to get its act together on the rural epidemic as well as prepare for the third wave.

I am amazed by the finance minister Nirmala Sitharaman’s statement recently that there is no need for a fiscal stimulus right now. She would rather we wait for the measures announced in the budget to work their way into the economy. I find this inexplicable, as all the signs seem to indicate that there is not enough demand in the economy, which has been my refrain for the past few years, if you’ve been reading my blog regularly.

Not fiscal stimulus, Ms Sitharaman, but economic relief is what the majority of the poor in the country need. And they need it now. Only the second of the three self-reliance economic packages announced last year was designed to help the poor and small businesses. And early November 2020 was when the last package was announced, which means India’s poor has had to face the worst of the second wave of Covid without any relief of any kind.

There is a clear need for economic relief in the form of the following:

• Economic package for the poor, especially rural poor, including farmers
• Healthcare package for the poor
• MNREGA scheme to be enhanced
• Greater food-grain distribution to the poor through PDS
• Debt relief for farmers, especially those affected by Covid. Not farm waivers which politicians love, but easier terms of credit and repayment
• A door-to-door testing and vaccination programme in India’s villages.

This will help the poor manage to stay alive and earn their living. One way to help pay for the additional spending, is to raise taxes on the wealthy and corporations. I thought last year itself was the right time to reverse the corporate tax cuts in India for a specific period, say, two to three years, for obvious reasons of the Covid pandemic. Similarly, taxes on the wealthiest earning incomes above Rs 1 crore (Rs 10 million) in India could have been raised for a period of three years. I think most companies and individuals to whom this applies would have understood the urgency and gravity of the situation. In any case, it is for the government to demonstrate the political will to take bold measures such as these. This would have contributed towards some of the extra spending, the rest coming from borrowing and divestments.

The World Bank has released a report on a surge expected in extreme poverty in low-and-middle income countries, because of Covid and India will be one of the worst-affected. Around 119-124 million people globally are believed to have slid back into Covid-induced extreme poverty, with 60% living in South Asia. A large proportion of this is likely to be in India. This is unfortunate, since it undoes all our good work in lifting people out of poverty since the start of the millennium. Now it is a question of survival for India’s poor.

Let us turn our attention to India’s rich now, fewer though they may be. How did India’s corporations do in the last quarter of FY21? No surprises here, as even the few corporate earnings that the Indian media cared to report were all good. Continuing with the trend of the past couple of years, most large companies have managed to pare their debt thanks to generous tax breaks and improve their balance sheets as well as their profits. Revenue too had begun to grow, though I wonder how it will sustain through the next couple of quarters. Many industries witnessed price increases thanks to rising global commodity demand and shortages.

In fact, inflation continues to rise in India, not least due to constant rise in fuel prices initiated by this government since it came to power in 2014. It is worth mentioning here that the government has no qualms about raising taxes and duties like the ones on fuel, which affect the poor disproportionately, rather than raise them on the wealthy and those who can afford to do their bit, like corporations.

Stock markets too seem to be on an inexorable rise, bearing no relation whatsoever to the fundamentals of the Indian economy. Sensex has gone from 34, 109.54 a year ago to over 52,000, a gain of 52.95% and Nifty has risen from 10,061.55 a year ago to 15,681.55, a gain of 55.84% as of June 4, 2021. The wealthy have gotten richer, while the poor or those just above the poverty line are sliding back into extreme poverty.

Despite the good performance of India’s corporates and stock markets, India’s economic recovery is faltering because – if you haven’t guessed by now – of weak consumption demand and Covid. The next quarter is when the full impact of all the localized lockdowns will be felt. And though we will have the really low base of last year to enhance our headline GDP number for Q1 of FY22, the underlying conditions will continue to be weak and muted. Only the government can set all this right and it is time to act now.

The featured image at the start of this post is of a railway journey to Goa by JK on Unsplash