What do the latest GDP numbers tell us? Sadly, nothing encouraging – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/view-what-do-the-latest-gdp-numbers-tell-us-sadly-nothing-encouraging/articleshow/83124097.cmsSynopsis

Barring agriculture, which continued its stellar performance, growing at 3.6% in FY2021, and electricity that grew at 1.9%, every other sector contracted during the year. The contraction in trade (–18.2%), construction (–8.6%), mining (–8.5%) and manufacturing (–7.2%) is particularly ominous, as these account for the bulk of jobs, especially low-skilled ones. And especially since any hope that the contraction may prove a temporary setback has been scotched by the second wave of Covid in March.

Democracy,’ said Winston Churchill, ‘is the worst form of government, except for all the others.’ Had Churchill been an economist, he might have said likewise of gross domestic product (GDP), or the annual money value of goods and services produced in an economy. Despite its many shortcomings, GDP remains the worst measure of economic activity, except for all the others. Globally.

Add to that pandemic-induced dislocations complicating the already challenging job of data collection, along with the Central Statistical Organisation’s (CSO) warning that ‘estimates are likely to undergo sharp revisions in due course’, and the perils of parsing GDP numbers released by CSO on Monday are immediately obvious. At the very least, they must be taken with a fistful of salt.

With that caveat, what do the latest GDP numbers tell us? Sadly, nothing encouraging. Data for both FY2021 and Q4 FY2021 mirror the havoc wrought by Covid-19 on economic activity. The only consolation, if any, is that the numbers are not as bad as feared. Q4 GDP grew 1.6%, up from 0.5% in Q3.

And though GDP contracted in FY2021, the extent of the decline (–7.3%) is less than what CSO had projected in the Second Advance Estimates (SAE) presented in February.

However, a closer look at the disaggregated numbers shows there is little to cheer. Sure, 3.7% growth in Q4 gross value added (GVA) is an improvement over the nominal increase of 1% in Q3 and the sharp contraction of 22.4% in Q1. But the improvement is not sufficient to change the narrative for the year. On the contrary.

Barring agriculture, which continued its stellar performance, growing at 3.6% in FY2021, and electricity that grew at 1.9%, every other sector contracted during the year. The contraction in trade (–18.2%), construction (–8.6%), mining (–8.5%) and manufacturing (–7.2%) is particularly ominous, as these account for the bulk of jobs, especially low-skilled ones. And especially since any hope that the contraction may prove a temporary setback has been scotched by the second wave of Covid in March.

Strengthen the Base
Chances are that large-scale, localised lockdowns will make Q1 FY2022 look like a replay of Q1 FY2021. So, what can we (read: government) do if the rest of the year is not to be replay of FY2021? First and foremost, address the immediate health crisis through aggressive vaccination. According to India Ratings and Research, the cost of vaccinating the entire population over 18 years will be just Rs 67,193 crore (0.36% of GDP), a fraction of the food subsidy budgeted for the year.

Second, make cash transfers to those at the bottom of the pyramid, especially those who have lost their job due to the pandemic. The collapse of consumption cannot be reversed unless the loss of incomes is made good. This is something only government can do, either through taxpayer money or through borrowing or, at worst, printing money.

Three, increase spending on infrastructure. At a time when private investment is not forthcoming, for whatever reason, the only entity that can invest is government. This will not only create jobs and provide incomes, but it will also crowd in private investment and set in motion the virtuous cycle of investment leading to growth.

Unfortunately, right from the time Covid hit us in March last year, GoI has preferred to act through the financial sector, especially public sector banks, in the form of loan guarantees, and RBI, rather than spend outright.

According to RBI’s annual report, though GoI announced measures that cumulatively amounted to Rs 17.2 lakh crore, its total expenditure increased by just Rs 4 lakh crore — from Rs 30.4 lakh crore in budget estimates (BE) FY2021 to Rs 34.5 lakh crore in the revised estimates (RE), including the increase due to on-budgeting dues to Food Corporation of India (FCI) that were earlier off-budget.

Ironically, GoI’s cash balances at the end of FY2021 stood at Rs 2.5 lakh crore, almost double the norm in recent years. There is only one word to describe the fiscal response to Covid to date — pusillanimous.

Yet, higher direct spending by government is the need of the hour, without which the economy is unlikely to revive. Unlike last year, again, when the sharp fall due to the very strong national lockdown in Q1 was followed by a reasonably strong recovery due to pent-up demand, and the belief that the virus had been beaten, this time, there is much greater uncertainty, thanks to localised lockdowns and fear of a third wave.

Carry Them Along
‘The Covid crisis will likely lead to increased inequality within and across countries. The more that vulnerable cohorts are left behind, the greater the risk of social, political and geopolitical instability in the future,’ warned economist Nouriel Roubini recently. In India, where a large section of the population is vulnerable at the best of times, Covid has rendered them even more so. Juxtapose that with the reality of the least bad form of government — democracy — with its implications for popular unrest spilling out on to the streets, and Roubini’s warning becomes doubly ominous.

Contrary to the finance minister’s statement on May 31 to The Times of India, there is every need to rush with a stimulus in response to the second wave of Covid.

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