It’s easy to predict backward in time. But when two official statistics on the slack in growth are 180 degrees apart, economics sounds more like the unpredictable quantum physics.
While the Ministry of Finance’s dutiful disclosure during the Budget session confirmed an output loss of Rs 9.57 lakh crore in FY21, on Friday, the RBI unloaded some spirit-amputating numbers. It believes, our economic scarring was double than the government’s estimate at Rs 19.1 lakh crore. That’s Rs 219 crore output loss every hour as against the finance ministry’s forecast of Rs 110 crore. There’s more.
The government statistics show an economy rounding into health, cracking the pre-pandemic level in FY22, but RBI’s under-strappers offered a less palatable truth pegging the output loss at a staggering Rs 17.1 lakh crore last fiscal, with another Rs 16.4 lakh crore likely to be hacked off from real GDP this fiscal. Such annual output haemorrhaging of Rs 10 lakh crore or more will persist for about a decade. And a total economic recovery, if we are to have it, will happen only a full 13 years from now. This, we have it on the highest authority -- the central bank itself.
The reason why the government and RBI’s estimates vary widely is due to their measuring methods. Disappointing, but finance ministry officials settled for a simple back of the envelope calculation assessing the loss from the previous year output and not factoring in potential growth. For instance, in FY20, real GDP stood at Rs 145 lakh crore, while output contracted by 6.6% to Rs 136 lakh crore in FY21.
This translates to an output loss of Rs 9.57 lakh crore. “Finance ministry’s estimate taking the loss over previous year, is a convenient way of saying that the loss wasn’t much and allowed the government to believe that there was not much that needed to be done,” Anil K Sood of Ideas Sans Ideology told Express.
On the other hand, RBI assessed the opportunity loss, recreating a growth path using the past trend of 6.6% and then estimating the GDP level assuming a growth of 7.5% for next 13 years, by which point we would have recouped the pandemic-era output losses. But not everyone agrees.
“Pandemic was a double whammy. It has compromised India’s ability to grow further. Therefore, RBI’s estimate that India would grow by 7.5% for the next 10+ years and we would be able to recover the opportunity losses is unrealistic, particularly when the government does not seem to recognise that it has a critical role to play in helping households improve their earning capability,” Sood reasoned.
RBI’s anticipated output losses may not be the final word either as quantifying the permanent loss of output is a challenge. As RBI admits, lessons from past crises reveal the reality of a permanent loss of output, reflected in deep wounds to investment and shortfalls in capital and total factor productivity relative to respective pre-crisis trends. Potential hysteresis effects of the pandemic operating through bankruptcies and capacity destruction are not fully quantified so far and may manifest themselves through balance sheet impairments and depressed new investment demand.’
Looking ahead, India’s economic rebound faces multiple challenges: deep-rooted structural bottlenecks, the Russia-Ukraine conflict dampening recovery momentum, high commodity prices, weaker global growth outlook, tighter global financial conditions and supply chains issues amplifying business uncertainty. Put simply, India’s growth recovery has never been closer and never further away.
As for arriving at the truer figure of the pandemic’s economic legacy, we don’t know and we may never even know.
RBI vs finance ministry estimates