Throughout the world, national economies have been devastated by the Covid-19 pandemic. Among the major global economies, that of India, the world’s second most populous nation and fifth largest economy, has taken a particularly hard hit. According to figures recently released by India’s National Statistical Office, year-on-year GDP growth fell by -23.9 per cent during April to June 2020, the first quarter (Q1) of fiscal year 2021. The double-digit fall in GDP, which equates to a 75 per cent fall in annualised GDP growth, is worse than expected, being the steepest in Asia, and also the worst among the G20 nations. It is also the worst recorded fall since India began issuing quarterly returns in 1996. The worst-hit sectors of the Indian economy include construction, trade, manufacturing, hotels, and mining. Only the agricultural sector, aided by a good monsoon, has grown by a modest 3.4 per cent. The reported drop in GDP is almost certainly an underestimate, largely because of incomplete recording of economic activity within the hidden economy, the so-called informal sector, which contributes around 30 per cent of GDP and accounts for as much as 70 per cent of all jobs in India.
In recent decades, India has been spectacularly successful in its journey towards global economic superstardom, one which has now abruptly skidded to a temporary halt. This rapid growth in the Indian economy dates back to 1991, when the IMF bailed out a nation struggling to overcome a balance-of-payments crisis. The IMF’s structural adjustment programme guided India to a new destiny, based upon the trinity of liberalisation, privatisation and globalisation. India was soon transformed from an inward-looking and protectionist Soviet-style economy, characterised by centralised planning and control, an inefficient bureaucracy, institutionalised corruption in the form of the licence-raj system, state ownership of major industry, and high import tariffs on foreign goods, to the Western-style mixed economy of today.
Continued economic growth appears unsustainable over long periods of time, no matter what economic system has been adopted, and India is no exception to the rule. India’s economy has thus been slowing down over the past five years, as reflected in a year-on-year fall in GDP. This slowdown has particularly affected the agriculture, automobile and real estate sectors, and can be attributed in part to a credit freeze due to reduced lending by banks and non-bank finance companies, weak consumer demand for goods and services, and falling private and foreign investment. Covid-19 has thereby merely speeded up a process already well underway.
Crises bring out both pundits and critics in abundance, and there is no shortage of either in India. The Indian Finance Minister, Nirmala Sitharaman, has been criticised for referring to an “Act of God”, on 27 August, seemingly making an excuse for what for some is more like “government inaction”. Many economists feel that the government’s May 2020 fiscal stimulus package, amounting to 10 per cent of GDP, is far too little and that containing the fiscal deficit low is not the answer to India’s current problems. More money needs to be pumped into the system. Consumers need a source of income in order to boost demand by increasing their consumption of goods and services, which is one of the biggest drivers of the Indian economy. Furthermore, government tax revenues have fallen because of corporate tax cuts, announced in September 2019, and inefficiencies in the collection of GST (Goods & Services Tax), a single nationwide indirect tax, which came into effect from 1 July 2017. The sudden demonetisation of high-denomination currency notes in November 2016 has also adversely affected the Indian economy, particularly by causing major cash flow problems within the informal sector.
It is not just a matter of economic crisis management. Some have also criticised the way in which the government has handled the pandemic. To start with, India was placed under a draconian national lockdown, at very short notice, starting on 25 March 25, until 30 May 2020, during which the economy came to a virtual standstill. At the time, the government felt that the Indian public health system would be unable to cope with a pandemic, which is unsurprising given that Indian government spends only 1 per cent of GDP on healthcare. But instead of flattening the growth of the virus, the growth of the economy has effectively been squashed by an unaffordable and often unenforceable lockdown, while Covid-19 has hit back with a vengeance, making India a global hotspot of the pandemic. Paradoxically, as the economy is being progressively “unlocked”, Covid-19 is spreading right across the country, from cities and towns into rural areas, further delaying the prospects of early recovery in the economy.
No one can predict India’s economic trajectory with any certainty, nor indeed be guaranteed to come up with the correct solutions. It is unclear as to when the recovery will commence, and whether it will be V-shaped or take some other alphabetic form. It seems likely, however, that the recovery will be painful and inevitably prolonged. But numbers alone cannot adequately quantify the untold human misery of massively high unemployment, especially the unprecedented losses of salaried jobs upon which so many Indians depend for their livelihoods. The economic shock of Covid-19 will hopefully provide the impetus for much-needed reforms to the public health and financial sectors, labour markets and the social care system in India. The shadow banking system of unregulated lenders of credit is in particular need of attention. We all live in hope and await the best possible outcome, given the most difficult circumstances.
Ashis Banerjee