- Disaggregated data contradicts the rosy picture that national accounts paint of our performance
- It’s premature to conclude that a recovery is underway, as our GDP rise in 2020-21’s third quarter was on a very low base. Also, other data sets reveal that distress remains widespread.
Estimates of growth in the third quarter of 2020-21 along with advance estimates of the full year were released last month by India’s statistics ministry. These showed that the country’s gross domestic product (GDP) increased 0.4% year-on-year in the October-December quarter, thus breaking the previous two quarters’ trend of declining GDP. Along with this, the advance estimates also revised the full year’s decline in GDP to 8% from 7.7%. That the economy had finally moved into positive growth territory was seen as a sign of economic recovery, with many claiming that the worst may finally be over as far as the covid pandemic’s impact is concerned.
Unfortunately, such a conclusion is based on nothing more than a statistical illusion. The positive growth on a year-on-year basis is largely a result of the weak output of the third quarter of last fiscal year, when growth in gross value added (GVA) was the lowest since the introduction of the new series of national accounts. In fact, GVA growth in the third quarter of last fiscal was the lowest in more than a decade. Given that the economy was already in the midst of a severe slowdown, even the next quarter is likely to show expansion, but this is largely a result of a low base. It is not a recovery in any true sense.
A sectoral break-up of growth suggests a sharp recovery in manufacturing, utilities (electricity, gas, water supply and other services) and construction. All these three sectors, incidentally, had seen negative growth in last fiscal year’s third quarter. Of these, manufacturing continued to show a decline in the fourth quarter of last fiscal, while utilities and construction had recovered by then. On the other hand, hospitality, trade, transport and communication, which together form the largest provider of employment after agriculture, showed negative growth of 7.7% over last year. Another reason to be cautious about these estimates is the fact that most of these numbers are based on early estimates of corporate sector performance. These are likely to be revised downward, once data from India’s large informal sector is factored in.
But the most important reason why one should exercise caution over claims of an economic recovery is a disconnect between disaggregated data of several key indicators and aggregate data from our national accounts. A manifestation of this are soaring stock market indices at a time when data on real wages for the third quarter suggest a decline. Labour bureau data available until November 2020 shows that real wages are not only lower compared to last year, but also compared to two years ago. Clearly, the distress in rural areas is real and not just a statistical illusion, and this has been so since before the pandemic.
We now also have data on employment from quarterly rounds of the Periodic Labour Force Survey (PLFS). Data for the April-June 2020 quarter, released recently, confirms the extent of job losses and rising unemployment pointed out by other surveys, such as the tracker of the Centre for Monitoring Indian Economy (CMIE). According to these, 25 million workers in urban areas lost their jobs between the January-March 2020 and April-June 2020 rounds following India’s lockdown restrictions on economic activity. The number of unemployed in urban areas during the same period increased from 16 million to 35 million. These estimates are only for urban areas, but combined with rural wage data, they suggest a sharp deterioration in living conditions and the extent of livelihood losses due to the pandemic. The unemployment rate of the entire population rose from 9% to 21%, and of the 15-29 age group, from 21% to 35%. That is, every third youth in the country’s labour force was unemployed.
This disconnect is not merely a statistical phenomenon, but a reflection of the nature of structural inequality in society and the economy. The economic policy followed in the past three decades, the last one in particular, has deepened inequalities. Sops, subsidies and bailouts to the corporate sector have protected their profits, while the cost of reforms, be it demonetization or adoption of the goods and services tax, has mostly been borne by India’s unorganized sector. The slowdown and pandemic have only exacerbated inequality, with profits of the organized sector rising even as distress in the unorganized sector increases.
This is a recipe for inequitable growth that causes instability and social unrest. The priorities of our economic policy must shift from simply chasing growth to correcting imbalances that result in grossly uneven outcomes.
(Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi. Article courtesy: livemint.com.)
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In another article published in Countercurrents.org, Is the Economic Impact of the Lockdown Over?, economist Arun Kumar writes:
The implication (of the official estiamates of growth figures) is that the economy has recovered from the recession in the first half of 2020-21 and is once again growing, even if marginally so. If this is true, then in the final quarter of 2020-21, the economy should recover further.
If the economy had started to grow in Q3 of 2020-21, does it mean that it has not only weathered the pandemic and lockdown induced problems but also largely overcome the pre-existing difficulties which had led to the sharp slowdown over two years?
Official Data Flawed
The government and the RBI use high frequency data to estimate the quarterly growth in the economy and predict the advance annual growth. A perusal of the list of variables used to estimate the growth rates shows that most of them are from the organised sector and a few from the unorganised one.
Thus, the data are incomplete. Agriculture is the only component of the unorganised sector whose data is used for quarterly estimation. But here also problems arose during the lockdown period. As this author has been pointing out, limited data for agriculture was available and it was assumed that targets were achieved. This was definitely not the case for perishables like fruits and vegetables which rotted in the fields or for poultry and milk, and these items constitute half the production in agriculture.
Thus, during the lockdown, the agriculture sector also declined by at least 10 percent rather than the officially claimed growth at 3.4 percent. No wonder farmers lost incomes and are protesting for the last 100 days.
For the rest of the sectors, the press note says that “the approach for compiling the advance estimates is based on Benchmark-Indicator Method” and “extrapolation of indicators”. Thus, the estimates are approximations. Further, it says, most “information (is) available for the first 9 months”. This methodology is problematic when the economy has experienced a shock and especially a sharp one like the lockdown neither the earlier benchmark indicators nor extrapolations will be valid. So the official estimates become guesses and are likely to be incorrect.
The press note admits that the lockdown had an “impact on data collection mechanisms”. Further, the note says this “will have implications on subsequent revision of these estimates”. Finally it says: “Estimates are, therefore, likely to undergo sharp revisions” and “users should take this into consideration when interpreting the figures”.
This raises the further point that if lockdown prevented data collection in Q1 and Q2 of 2020-21, much of it cannot be collected later on. Thus, the data for these quarters will remain permanently flawed.
Consequently, calculating the growth rate for these quarters and for 2020-21 as a whole, will have errors. The implication is that the official growth data cannot be relied on. Is there an alternative to it?
Current Growth
As already argued, the official data is based largely on some indicators collected from the organised sector. Even the complete organised sector data is not available. For instance, data for companies is based on reports to the stock markets but only a few hundred company reports are available at any point of time and not all companies’ reports.
Some sectors of the economy have done well since demand for their products and services increased during the pandemic. For instance, pharmaceuticals, FMCG, telecommunications and IT sector were in great demand. Due to curtailment of public transportation and other reasons, demand for personal transportation has shot up and the automobile industry has grown.
But for the entire manufacturing and services sectors, demand decreased due to decline in employment and consequent fall in demand. People are also worried about another wave of infection, so consumer sentiment remained low even in January 2021. Due to the overall decline in demand, capacity utilisation is at 65 percent according to the RBI governor. That is way below its level in January 2020. As a consequence, investment remains below last year’s level.
A decline in consumption reflects in both reduced output and investment compared to the previous year. In turn, this reflects in low credit off take. The RBI data for January 2021 shows this. The decline is particularly marked in the case of large industry which is responsible for more than 80 percent of the credit taken. The implication is that large industry has not yet recovered to the 2020 January level in January 2021 which is the first month of Q4. So one cannot conclude economic recovery in Q3 based on organised sector data.
Unorganised Sector
The unorganised sector was very hard hit and has not recovered to its January 2020 level, as the limited data available indicates. Demand for work under MGNREGS remains high and reports suggest that many demanding work under it are not able to get it since funds are exhausted. Also, instead of 100 days of work per year for one person per family, only about 45 days of work has been available. This, in spite of the budgetary allocation having been increased from Rs 60,000 crore to Rs 1.1 lakh crore.
A recent study points out that 20 percent of those who lost work during the lockdown have not been able to regain it. Data also indicates that many have simply dropped out of the workforce, especially women.
AIMO has been reporting that many small businesses are closing. Further, 20 percent are unable to repay EMIs and are likely to default. The RBI has been anticipating a rapid rise in NPAs in the coming months. Further, the rise of e-commerce has been at the expense of brick and mortar stores. CAIT has been saying that many small traders will have to shut shop.
This example also points to the growth of the organised sector at the expense of the unorganised one as demand has shifted from the latter to the former. This leads to an over-estimation of the growth rate of the economy.
Many contract services have not been able to revive to their pre-pandemic levels due to fear in the minds of customers. For instance, services of taxis, beauticians, hair dressers and gyms remain below last year’s levels. Similarly, transportation, travel, tourism, hotels and restaurants have not gone back to their pre-pandemic level of operations. This is true both for the organised and unorganised sectors. In brief, not only has the unorganised sector not recovered to January 2020 levels, even many parts of the organised sector have not. So the Q3 data cannot be relied on.
Conclusion
The government, instead of boosting demand, has heavily tilted in favour of supply side policies. Such policies, even if they are the correct ones, will impact the economy over the medium and long term.
So when demand is short and capacity utilisation low, investment will not revive and economic growth will remain down and the long term goal would not be achieved. Supply side policies also lead to greater inequality and that further impacts demand, as has been seen since the time of demonetisation.
Unfortunately, Union Budget 2021-22 does little to check the growing inequality and the stock markets are fuelling greater inequality. Both these trends will further dampen the prospects of economic revival in India.
(The writer was Professor of Economics, JNU, presently Malcolm Adiseshiah Chair Professor, Institute of Social Sciences.)
