It’s the Beginning of the End

Even if there’s a Covid resurgence, India’s economic turnaround is heartening

India is recovering from the Covid-19 recession much faster than seemed possible a few months ago. GDP crashed 23.9% in the April-June quarter, among the sharpest falls in the world. But in the July-September quarter, GDP is down just 7.5%, a big improvement.

Other countries have been hit by a second Covid surge and accompanying curbs on economic activity. But not India. All short-term indicators from October onward — electricity consumption, rail freight, auto sales, goods and services tax (GST) receipts — keep rising. If this trend continues — admittedly a big if — India may return to its pre-Covid GDP level by December 2020 or March 2021, not December 2021 as earlier feared. That will be a notable feat.

Good Job

Caveat: corporate profits have risen sharply at the expense of wages and small and medium enterprise (SME) profits. That is unsustainable.

Adeep recession causes massive unemployment. That hit India during the April lockdown, but has fallen consistently since then. The 6.7% unemployment rate for September was lower than even the pre-Covid level of 7.6% in February. Rural wages have been rising, not falling. Centre for Monitoring Indian Economy (CMIE) chief Mahesh Vyas has cautioned that a falling unemployment rate is misleading, since labour force participation has fallen by 20 million, with people just not looking for work. Point taken, but that is a longer-term trend. Rising rural wages and falling unemployment rates in a deep recession are worth two cheers, if not three.

Remarkably, India has achieved this with the smallest fiscal stimulus of any major country. Japan’s fiscal stimulus was 21% of GDP, the US went for 13% and is planning an additional 10%, Brazil’s was 12% and China’s 7%. India’s adds up to barely 2% after several rounds of stimulus. I have castigated this parsimony: a much bigger stimulus could have relieved distress much more.

But Indians do not seem to blame the government for insufficient relief. BJP won the Bihar election despite the state having the greatest forced unemployment and return migration. The subsequent fall in unemployment and rise in manufacturing output suggest that most displaced labour has returned to work. India has proved more resilient than one dared hope. A good monsoon and the extended family system have done yeoman service.

Since GDP looks like falling much less than feared, so does the fiscal deficit-to-GDP ratio. The debt-GDP ratio, which some feared would exceed 90%, may be closer to 85%. Economist Ananth Narayan of the Observatory Group predicted the true fiscal deficit (minus fudges) at 15% of GDP for the Centre and states combined. Perhaps it will end up at10% without fudges, and less with fudges.

Bloomsday Forecast

The finance ministry has, from the start of the Covid-19 crisis, emphasised fiscal prudence, relying mainly on monetary measures and loan guarantees, rather than massive budgetary handouts. Having predicted that this would fail to check distress or stimulate the economy, I need to eat crow. Fiscal rectitude has kept government finances in surprisingly good shape, without producing a voter revolt in Bihar, or thwarting a sharp economic recovery. I still think the severity of the March lockdown and fiscal parsimony was grossly overdone. But actual outcomes have exceeded my gloomy expectations.

In a deep recession when demand collapses, industries stop investing in fresh capacity, seeking first to use excess capacity. In such circumstances, the right approach for the government is greatly increasing investment in infrastructure, using printed money from RBI. The problem is that clearing infrastructure projects and acquiring the land can take years, by which time the recession is long over.

It is a disgrace that the eastern and western dedicated freight rail corridors remain incomplete after almost 15 years of work. The Mumbai-Ahmedabad bullet train is similarly crippled, as are nuclear power plants once planned with France. India needs fast acquisition procedures to speed up project completion. Only then can infrastructure investment become part of an anti-recession policy.

Gross capital formation is vital for future growth. This peaked at 37% of GDP a decade ago, and was 28-29% of GDP in real terms before Covid-19. It fell to 22.3% in the first quarter, but has recovered sharply to a heartening 29% in the second quarter. If the trend continues — another if — the economy will heal faster than one could have expected.

Inflation normally collapses in a recession, but has risen disconcertingly in India, with consumer prices up 7.6% in October. This reflects mainly in high vegetable prices after excess rains destroyed the kharif crop. But core inflation also remains high at 5.8%. One reason is that GoI mopped up the fall in global oil prices through higher taxes, reducing consumer benefits.

Inflation adds to misery in difficult times. But it has a silver lining. It means nominal GDP may contract very little in 2010-21. That, in turn, means the ratios of the fiscal deficitand debt-to-GDP will be much lower than feared. Covid’s long-term scars will be shallower than expected.

A virus resurgence could yet upset the apple cart. And India has deep structural problems to tackle. But its resilience so far is good news.

What do you think?