The expected has come to be. Earlier this week, India was informed that the economy had contracted by 23.9 per cent in the April to June period of financial year 2020-21 - the worst contraction among major economies.
Essentially, the contraction validates that India had a severe lockdown and the consequence of the shutdown. There has been much lather about why, what, how et al - for instance, on the claim of the chief economic adviser that India is currently “experiencing a V shaped recovery”. The discourse is engaging and yet distracting.
The real threat confronting the long-term sustainability of the India Story precedes the lockdown - and is visible in data for the previous quarters. Manufacturing, billed as a way out of low-and-yet-not-middle income rut, grew at an average of barely 3 per cent in the past eight quarters.
Mining and quarrying, which deliver jobs and monetisation of minerals, has recorded negative figures in five of eight quarters. Construction, which is a major job provider at the intersection of urban and rural economies, grew by just 3.7 per cent in eight quarters preceding the pandemic.
The parade of sub-optimal performance - driven by a series of disruptions from demonetisation to GST to the sclerosis of credit delivery - is reflected in the overall picture. GDP for eight quarters preceding the pandemic has been just 5.2 per cent and a GVA of 5 per cent have hurt savings and investments. The lower average has profound long-term implications.
Assume the economy will take two or three more quarters to normalise. The consequent loss of incomes, revenues, jobs and enterprise value will weigh heavily on revival. Neelkanth Mishra at Credit Suisse estimates 50 per cent of loss in GDP is borne by the government - it gets socialised.
Of the rest 25 per cent will be borne by wage earners, 15 per cent by the informal sector and 10 per cent by corporates. This means millions of households could be pushed below poverty line and will affect demand and consumption. A poorer kitty would leave informal enterprises and corporates with no headroom for new investments.
The simple arithmetic of reverting to even pre-pandemic levels is daunting. To appreciate the risks embedded in the spectre of lower than potential growth consider an analogy from cricket. The longer the batsmen allow dot balls, the lower are the chances of achieving the required strike rate - and a Dhoni or Tendulkar type finish would require a quantum change in global growth which looks unlikely.
The principle of growth tells us that the longer an economy performs below its potential, the deeper it will drag its potential growth rate. As technology expands its footprint, the scope for job creation will shrink. The longer a person is unemployed the higher are the chances of the person being unemployable.
It is true that the RBI has acted with agility and sagacity cutting interest rates, enabling liquidity and has followed the end of moratorium with a promise for restructuring of loans. It has also crafted new inclusive lending norms — including smart financing avenues for agri start-ups, input integration and solar power farms. Much will depend on execution.
Be that as it may RBI’s lending power is not the same as government spending power. The circumstance calls for urgent intervention to address the demand side of the economy. However, the government believes "the evidence is that the problem is not susceptible of stimulation by fiscal or government measures" and that government may look at second stimulus package once COVID-19 abates. The hypothesis of the government and the wait and watch approach is baffling and problematic.
Classically, stimulus is about creation of jobs to generate income and spur demand — in that order. India needs to ramp up testing across states, staff health care centres and expand access to telemedicine. Students have been shut out of schools. Access to devices, data connectivity and tutors on contracts to assist teaching would help. Would these not help manage the effects of pandemic and stimulate the economy?
The rural economy is the only consistent performer and new initiatives in agriculture call for improved rural connectivity for better access to inputs and markets. The money order economy of many has been badly hit.
The Mahatma Gandhi National Rural Employment Guarantee Scheme is the sole lifeline for millions of migrant workers who went back home. There is speculation that the scheme could find an urban avatar. These programmes implemented by state governments are in dire need of funds. Must that wait for COVID-19 to abate?
The call for urgent intervention is essentially a cry for a measure of certainty that there is a plan — even if actual expenditure is phased over time. The consequence of a delayed stimulus package is a deeper contraction and a steeper climb for revival. What the government may be trying to avert in costs will visit the budget as a price - lower growth, lower revenues and higher deficit.
Context is critical. The principle in medicine and economics are not dissimilar - earlier the better. It is useful to remember what Roman educator and thinker Marcus Fabius Quintilianus said, "Whilst we deliberate how to begin a thing, it grows too late to begin it."
(The writer is author of 'The Gated Republic', 'Aadhaar: A Biometric History of India’s 12 Digit Revolution', and 'Accidental India' and can be contacted at shankkar.aiyar@gmail.com)