The National Statistical Office recently released the Estimates of Gross Domestic Product (GDP) for the first quarter (Q1, or April-June) of fiscal year 2021-22 (FY22), which showed that India’s GDP had increased by 20.1% as compared to the corresponding period in the previous fiscal, which had witnessed a 25% decline, the worst that any quarter had experienced in the post-Independence period. The government’s reading of the Q1 FY22 GDP numbers, as articulated by the Chief Economic Adviser (CEA), was that the economy is on course for a “V-shaped” recovery. According to the CEA, not only has the economy rebounded strongly from the depths of the crisis, some sectors like petroleum and auto have also recovered to their pre-Covid levels. However, when the current set of data is juxtaposed with the numbers from the pre-Covid period, the picture that emerges does not quite match with the one provided by the CEA. Let us understand why this is so.
The basis on which the CEA has arrived at his conclusion of a V-shaped recovery is quite simple. The economy suffered a decline of nearly 25% in Q1 of FY21 and has experienced an upturn of 20.1% a year later. There should therefore be no doubt, as Chart 1 shows, that India has been witnessing a V-shaped recovery.
However, instead of GDP growth, if the trends in quarterly estimates of expenditures on GDP at constant (2011-12) prices as shown in Chart 2 are considered, the conclusion regarding the state of the Indian economy changes dramatically. These estimates show that although India’s GDP did go back to the pre-Covid period in Q4 of FY21, i.e. in January to March of the previous fiscal year, it suffered yet another steep fall in the immediately succeeding quarter. Therefore, if changes in GDP are measured from one quarter to the next, as is done in the US, the GDP in Q1 of FY22 had declined by 17%. This sharp setback has pushed India’s GDP below its level in Q3 of FY18, which was 15 quarters ago.
This scenario is hardly surprising because the mainstay of the Indian economy, namely private final consumption expenditure (PFCE), has continued to remain depressed. In better times, PFCE has been well over 55% of the GDP. This is expected given that a sizeable section of the population has low levels of income and their propensity to consume is high. But in the past several quarters, the share of PFCE has struggled to remain close to 55% and in Q1 of FY22, it barely touched this figure. Significantly, the depressed state of PFCE reflects the labour market conditions, which suffered unprecedented shocks in the wake of the lockdown following the onset of the pandemic. Current evidence shows that the job market continues to remain on a low keel.
As in the case of the quarterly trends in GDP, which do not endorse the CEA’s view of a V-shaped recovery and getting back to the pre-Covid levels, the PFCE trends in Chart 3 also show that in Q1 of FY22, PFCE had dropped to a level that was not witnessed since Q2 of FY18, which was 16 quarters ago. But unlike in case of GDP, which seems to have recovered to the pre-pandemic level at least in Q4 of FY21, PFCE trends do not show demand conditions in the economy having recovered to the pre-Covid levels.
As regards the major sectors of the economy that suffered the most from the impact of the pandemic, the current situation mirrors the trends of the indicators mentioned above. This is especially true of manufacturing, including the automobile sector, which is still some distance away from pre-Covid levels.
The discussion around the GDP recovering to pre-pandemic levels has missed one important point, which is the fact that the Indian economy was already decelerating during that phase. For almost nine consecutive quarters beginning with Q4 of FY18, India’s GDP had declined steadily from 8.1% to 3% in Q4 of F21. The government, which had set the target of a $5 trillion economy by 2024-25, had recognised this reality in the Economic Survey of 2019-20 when it commented that the “march towards this milestone [had been] challenged by the less-than-expected growth of India’s GDP”.
There cannot be any disagreement that it is vitally important to take a realistic view of where the Indian economy stands today, for this would determine the steps that must be taken in the coming months to ensure sustained levels of growth can be achieved. In a situation where the demand continues to remain depressed, the critical role of the government cannot be denied. The Biden administration accepted this truism immediately after taking over the reins by providing a stimulus package for buttressing demand. Hopefully, the Indian government would also respond adequately for reviving domestic demand soon.
Biswajit Dhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU (bisjit@gmail.com)