SynopsisIf the problems of the unorganised sector are not addressed, it is only a matter of time before the lower leg of the ‘K’ drags down the upper one to make it closer to a ‘W’.
Trying to make sense of macroeconomic numbers in a large and complex economy like India, with a sizeable unorganised sector to boot, is a bit like trying to fit the pieces of a jigsaw puzzle. Some pieces fit, while others just don’t. The Central Statistical Organisation’s (CSO) second advance estimates for GDP growth in 2020-21 and Q3 (October-December 2020) are no exception.
So, what is it about CSO’s numbers that don’t quite add up?
One, on the face of it, 0.4% GDP growth in Q3 should call for celebration. After all, GDP contracted 24.4% in Q1 and Q2 (–7.3%) looked better only in comparison. However, while Q3 growth seems good in isolation, some of the sheen comes off when you take a closer look at revisions for earlier years. Thus, growth for the comparable quarter in the previous year has been lowered from 4.1% to 3.3% in the latest release. So, some of the growth in Q3 FY2021 (by how much is hard to quantify) is, possibly, explained by the ‘base’ effect — numbers looking better because the comparison is with a lower base.
Two, despite the better-than-expected Q3 growth, and the prospect of further improvement in Q4 as economic activity resumes, CSO has lowered its estimate for annual growth in 2020-21. As against a 7.7% contraction estimated earlier, it now expects the economy to contract 8%.
Agreed, the disconnect could possibly be explained by revisions in Q1 and Q2 numbers. But the net effect of the revisions — one up, the other down — does not entirely explain its expectation of a deeper contraction in economic activity during 2020-21 than projected earlier. Not when high-frequency indicators are on the uptick, or so we are told, and corporate profits (judging by the stock market) are healthy.
Or, when on a sequential basis, every sector, with the exception of construction, performed better in Q3 than in Q2, testifying to steady improvement in economic activity.
Most importantly, the sharper annual decline comes in the face of increased government spending in Q3 that is expected to increase even further in Q4. As at the end of January 2021, government had reached only 66.8% of its higher revised fiscal deficit, leaving it with ₹6.15 lakh crore that could be spent in the remaining two months to the end of the current fiscal.
Making-Up
This is not to say there are no positives. There are many. Manufacturing, which is where we must look for job creation, is up 1.6% as against contraction of 0.8% in the comparable period last year, and a growth of just 0.6% in Q2. Finance is up 6.6% as against 3.3% in Q3 FY2020, and a contraction of 8.1% in Q2 of this fiscal, suggesting — fingers crossed — that the financial sector, which holds the key for economic revival, is on the mend.
Gross value added (GVA) — which many will argue is a better indication of economic activity as it is stripped of the effect of taxes and subsidies — is 1% higher in Q3 compared to the 0.4% increase in GDP, suggesting recovery is on solid grounds. Even better, gross fixed capital formation, a measure of investment that is the building block of economic growth, is higher as a share of GDP, as is growth, compared to Q2.
The more difficult question is not the exact growth rate, or whether it is a few decimal places more or less, but how we can ensure the recovery is sustained and bettered. More importantly, what kind of recovery do we want? Over the past many months, we’ve gone through a gamut of letters — U, V, K — to describe the recovery process.
Sure, we’d all love to have a V-shaped recovery. But the picture is far from unambiguous and, given the problems with macro data, open to alternate interpretations. So, it may look like a ‘V’ to optimists but a ‘K’ to sceptics (realists?) — corporates with good profits, thanks to cost-cutting and lack of competition from the unorganised sector, shaping the upper leg of the K, even as the unorganised sector makes the lower leg.
W for Wictory
The problem gets compounded if you marry growth numbers with numbers on the job front. With 18 million jobs lost, according to some counts, it’s hard to argue the recovery looks like a ‘V’. More ominously, if the problems of the unorganised sector are not addressed, it is only a matter of time before the lower leg of the ‘K’ drags down the upper one to make it closer to a ‘W’.
This is where government comes in. Its decision to spend on infrastructure, create jobs and incomes is bang on. But it needs to walk the talk to ensure we get back, not just to the pre-Covid growth of 4%, but to the average of the years before, close to 7%. It is not impossible.
It doesn’t help, of course, that the letter ‘V’ precedes ‘W’ in the alphabet. But that’s only for the superstitious.
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