This Article is From Sep 02, 2020

So How Bad Is India's Economic Crisis? Brace Yourself.

One does not need a weatherman to figure out which way the wind is blowing. Whether one goes by data or anecdote, that the Indian economy has been experiencing a contraction - rather than growth - since March 2020 has been evident from all accounts. It has been almost six months since the crisis broke, we are no longer using the strange term "negative growth," and are getting used to calling the change in GDP for what it really is: a contraction (imagine using the term "positive contraction" instead of growth when the economy turns around!).

Therefore, the recently-released estimates of the GDP for the first quarter (April to June) of the financial year 2020-21 by the National Statistical Office (NSO), under the Ministry of Statistics and Programme
Implementation, are merely official confirmation of what was widely expected. In fact, their estimate of a contraction of 23.9 percent at constant (2011-12) prices is worse than what the general expectations were for the first quarter's GDP, and has led to a general downward revision of the estimated growth rate for the financial year 2020-21. The IMF's World Economic Outlook in June had put the expected rate of decrease in India's GDP for the financial year 2020-21 at 4.5%, while other estimates before this released by the NSO had put it in the 5% to 6% range. The revised estimates are putting the rate of contraction of GDP for the financial year 2020-21 to be in the 7% to 11.5% range.

How bad is this?

By historical standards, the quarterly drop of 23.9% is the largest since we began releasing quarterly GDP data in 1996. Looking at annual rates of change of GDP for which we can go back to much earlier times, there are only four instances of a contraction in the post-Independence period: 1957-58, 1965-66, 1972-73, and 1979-80. The largest drop thus far was 5.2 percent in 1979-80.

Even if the growth rates for the remaining three quarters of the financial year turn out to be zero (no growth or contraction compared to the same quarter in the previous financial year), which is highly unrealistic, the annual rate of contraction will be approximately 6%. Therefore, given the current outlook, the rate of contraction in 2020-21 will easily be the highest in the post-Independence era.

Of course, the Covid-19 crisis is not unique to India. It is a global shock that is playing havoc across the world. Therefore, to have a sense of how bad the economic impact has been, we should also compare India with other countries. According to the IMF's World Economic Outlook, the expected reduction in GDP in the financial year 2020-21 are the following: for the world as a whole, it is 4.9%; for emerging markets and developing economies, it is 3%; and for low-income developing countries, it is 1%. Of course, all these numbers are provisional estimates, but even here, the economic impact for India does not look good, especially in comparison with other emerging and developing countries in Asia included in this report, such as China, Indonesia, Malaysia, and Philippines.

Are other economic indicators in line with what the GDP estimates are suggesting?

India has a large informal sector that contributes about half of its GDP. As is well known, the measurement of informal sector output is largely a matter of guesswork and therefore, we do not have good estimates of how badly this sector has been hit. However, some surveys carried out by various researchers after the crisis broke give us some ideas. One such study by researchers at the Azim Premji University on the effect of the crisis on self-employed, casual, and regular wage workers across 12 states of India between mid-April to mid-May reported a 64% drop in earnings, which is more than two and a half-times the reported decrease in quarterly GDP. Another study by researchers at the Centre for Economic Performance at the LSE that surveyed urban workers found that earnings fell by 48 percent in April and May compared to January and February. Even if we make the conservative assumption that from mid-May to the end of June, there has been some improvement in this regard, these and similar other studies suggest a bigger drop in GDP than what the 23.9% figure suggests.

A sharp rise in unemployment would be another indicator of the economic impact of the crisis. According to CMIE estimates, the unemployment rate peaked to above 23% in the months of April and May, nearly three times what it was in the months of January and February, and came down to 11% in June. This is in line with the reported drop in the quarterly GDP figure.

Another interesting indicator of economic activity, at least for urban and semi-urban areas, is electricity consumption. A World Bank study compared daily electricity consumption during the lockdown to predicted levels and found that electricity consumption was 30% below normal levels at the end of March. Over the three months that constitute the first quarter, namely, April, May and June, the average daily drop in electricity consumption level was 24%, 13.5%, and 8.2%, respectively.

Therefore, whatever the limitations of using the GDP as a measure of economic activity might be, there are two immediate conclusions one can draw from the reported quarterly GDP figure. First, the negative economic impact of the crisis has been large for India whether one looks at its own past record or the contemporary experience of other countries. Second, the drop in GDP is in line with other macroeconomic indicators, but very likely under-estimates the impact on the informal economy where a vast majority of the population is employed, which implies that the crisis has hit the poor harder. Given the large fraction of the population that is poor, the drop in GDP does not fully capture how badly the crisis has affected people's lives. 

(Maitreesh Ghatak is Professor of Economics at the London School of Economics and an elected Fellow of the British Academy.)

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