GDP Takes a Hit – Analysing the fall in the Indian economy

Grim news about India’s worst performance in terms of GDP growth in the last 40 years triggered debate and discussion about our GDP story once again. India recorded negative growth of minus – 7.3% for the fiscal year 2020-21, with the last quarter of the financial year clocking a mere 1.6%. Let us explore some of the reasons behind this disquieting economic situation and the possible paths we can embark upon to bounce back as a strong and vibrant economy in the long term.

THE FALL HAS A HISTORY

It is obvious that the Coronavirus pandemic devastated our economy as it did many countries all over the world. Disruption in the supply chain and depressed demand along with severe curbs on mobility and physical movement/availability of goods and services left the economy in disarray besides causing one of the most debilitating health crises we have ever experienced. However, if one goes back a bit further, we realise that our GDP had begun faltering even before the pandemic and the virus simply acted as the proverbial “straw that broke the camel’s back”.

Please look at Table 1.1 to understand the rise and fall in our GDP.

So if one looks at the numbers from Quarter 4 of 2016-17, it is a downward slide that is also a sad reflection on the competence of those in the highest echelons of power and guiding India’s economic policies. Note that the size of India’s informal economy is almost half of its entire size and employs nearly 80% of our workforce.

The demonetisation announced on 8 November 2016 left its marks of destruction on our GDP story as the informal economy was virtually electrocuted by that decision. Add GST rollout and a sluggish global economy that affected our exports along with rising NPAs in the banking sector prompting a decline in credit offtake and we suffer a phase that is truly the antonym of the promised “achche din”.

OUR ACTUAL LOSS

The World Bank has projected India’s economy to grow by 8.3% in fiscal 2021-22 and 7.5% in 2022-23. Even if we manage to meet these expectations, our growth should actually be compared to the numbers we achieved at pre-pandemic levels. Moreover, we should calculate our actual losses had we managed our economy efficiently that minimised the impact of the virus just as some countries, notably China, have done.

In the Executive Summary of a report by the Centre for Sustainable Employment, Azim Premji University titled “STATE OF WORKING INDIA 2021, One year of Covid-19” the authors say: “Our analysis shows that the pandemic has further increased informality and led to a severe decline in earnings for the majority of workers resulting in a sudden increase in poverty. Women and younger workers have been disproportionately affected. Households have coped by reducing food intake, borrowing, and selling assets. Government relief has helped avoid the most severe forms of distress, but the reach of support measures is incomplete, leaving out some of the most vulnerable workers and households. We find that additional government support is urgently needed now for two reasons – compensating for the losses sustained during the first year and anticipating the impact of the second wave.”

The same report quotes ‘The Pew Research Center’ which estimates that the middle class in India will shrink by 32 million and the low income class by 35 million with many of them becoming poor. Reversing these losses will not be an easy task, for which India will have to consistently post double digit GDP growth every quarter, which given the state of affairs of our governance, planning and system of education and healthcare is definitely a tall order.

THE LACK OF VISION

In a recent interview to Karan Thapar for The Wire, former RBI Governor and renowned economist Raghuram Rajan talked about how India should move forward and rued the lack of a clear vision (in India’s top leadership) for the future and steering the Indian economy on the path fast and sustainable growth.

Rajan said: “I think the question for us going forward is really how we come out of this (pandemic) to our levels of growth that we had earlier. We should be moving to take our economy to where it was earlier. Small and Medium enterprises, tons of them have built up debt, the ones that are still surviving. Many have closed. What are we going to do about the debts they built up. Are we going to waive them or negotiate them down. What processes do we have to negotiate them down?

“The RBI has been quite compassionate in offering forbearance. But forbearance kicks the problem down the road. Eventually somebody has to pay the piper. Somebody has to pay the debt holder, unless you renegotiate it. Do we have the processes to do that? So, forget the past.

“What about the future? This is all about repair. Can we repair the damage done to the economy? We need to be thinking about the vision for the future. 10 million people coming to the labour force coming every year, what are we doing both to remedy what we lost and also to create employment for these people. We were not growing fast enough to employ these people, which is why we are having these agitations by the Patels, by the Jats. Because land is not enough to occupy them. They are looking for jobs. Everybody wants a government job because you don’t see the private jobs coming. What are we doing on creating new jobs? What is the vision we have? And unfortunately vision is something we don’t see right now.”

A NEW APPROACH

Given the state of our economy due to the pandemic, it is important for policymakers and economists to explore all avenues to reduce our debt-burden and encourage equity financing. Allowing the emergence of interest-free banking and boosting the informal sector through zero-interest microfinance will go a long way in resurrecting India’s economy. The informal economy can be resurrected by focusing on SMEs.

“Credible studies have clearly indicated the rich contribution that SMEs can make to employment and income, they create new jobs not only directly but also indirectly by expanding incomes, demand for goods and services, tools and raw materials, and exports. They are labour-intensive and require less capital and less foreign exchange. They rely primarily on personal savings, retained earnings, and need much less access to credit from governments and financial institutions compared with largescale industries. They invent new products, revive lost skills and help economies move into new kinds of work. They can be more widely disbursed and thus help maintain the link between a person’s place of work and his home which largescale industries and hectic urbanisation have severed to the detriment of social health. Moreover, they are at least as efficient as largescale industries.” (M Umer Chapra in Islam and the Economic Challenge)

The Muslim community of India must wake up to the challenge of presenting the solution offered by Islamic Economics when the economy is recovering from recession and periods of negative or low growth. The reward for their efforts will be both material and spiritual.