Note: A version of this piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.
Former World Bank chief economist Kaushik Basu described India’s GDP growth of 20.1% in April-June 2021 as “shocking bad news”, even as Prime Minister Narendra Modi’s PR machine was hailing it as a great economic recovery.
How could the data be read in such diametrically opposite ways?
Basu explained the simple math: the 20% growth in April-June 2021 was actually a decline of 9.2% over the output level in 2019. It is even lower than the 2018 figure! Basu described the optical illusion of “high growth” from a low base created by the world’s harshest national lockdown last year. It demonstrated that the GDP growth in April-June this year was no V-shaped recovery, as claimed by the finance ministry’s spin doctors. On the contrary, it will take a while to reach pre-pandemic output levels.
Deeper causes for worry lie in the disaggregated data. Gross fixed capital formation (GFCF), a key driver of growth, was Rs 10.22 lakh crore in April-June 2021. This is lower than the GFCF of Rs 12.33 lakh crore in April-June 2019. Where are the big budget allocations of capital investment, part of the Rs 100 lakh crore National Infrastructure Pipeline project which kicked off in 2020-21, which were to provide massive investment stimulus after the pandemic?
If proportionate infrastructure investment allocations were made this year, gross capital formation would not have been lower than in 2019. And remember, the overall investment to GDP ratio has consistently fallen in the last eight years from about 34% of GDP to 28% in 2019-20. Private final consumption expenditure in April-June 2021, at Rs 17,83,611 crore, is about the same as 2017-18’s Rs 17,83,905 crore! Private consumption, a primary demand driver, has regressed all the way back to the 2017-18 level.
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If one looks at the performance of key employment generating sectors like manufacturing, construction, trade, hotels, transport and communications, the picture is equally dismal. Official data shows manufacturing gross value added (GVA) in April-June 2021 at Rs 5,43,822 crore. This is lower than in the same quarter in 2018-19. GVA in construction was higher in April-June 2017-18 than in 2021-22. Highly employment-intensive segments ― trade, hotels, transport and communication services ― have seen a 30% decline in GVA in April-June 2021, compared to the same quarter in 2019-20. In short, the economy is still struggling to get to levels seen in 2019 and 2018 in many key sectors. No wonder the IMF has said that India’s economy could be the last among the G20 to recover fully.
The first challenge for India is to regain pre-pandemic output levels, which may happen only in the next financial year. But that is not enough to bring back consumption demand. Sustained demand will return only after the income loss in the post-pandemic period is fully compensated. Say, your income was Rs 100 before the pandemic and was reduced to Rs 80 for two years after. The total income loss of Rs 40 remains even if your income climbs back to Rs 100 after two years.
Economist Pronab Sen says that typically, if savings are drawn down during sustained income loss, the first priority after income recovery is to replenish, and consumption may be postponed. This could further delay sustained growth recovery. Given these complexities, the Modi government’s economic advisers would do well to remove the letter ‘V’ from their alphabet soup.
