Why economists aren't buying PM Modi's high-decibel spiel on green shoots

Some, in fact, see downside risks even to their own assessment of economic contraction in FY21

Everyone, from Prime Minister Narendra Modi to Finance Minister Nirmala Sitharaman to Niti Aayog CEO Amitabh Kant to GST Network, has pointed to green shoots of recovery emerging in the economy. 

However, none of the economists have scaled up the Prime Minister's projections for the economy during 2020-21. If green shoots are indeed there, why are economists not revising up their forecasts?  

In fact, some of them see downside risks even to their own assessment of economic contraction in FY21.

In his recent remarks, Modi based his assessment of green shoots on power consumption, fertiliser sales, kharif sowing, exports, and digital payments in retail among a few other metrics. But by adding a few more parameters such as petrol consumption, purchasing manager's index for manufacturing and services and e-way bill generation, one will find that the economy isn't doing that well after all.

Fertiliser sales and kharif sowing show green shoots in the economy even as the former declined a bit in June, compared to May. But agriculture was, in any case, expected to be the only silver lining in the economy in the current financial year. Generation of e-way bills also indicates greater consumption of goods. Digital payments in retail are yet to come to pre-Covid levels. There is a contraction in power demand year-on-year even as the rate of contraction itself declined. The rate at which merchandise exports are shrinking has also begun reducing. 

All this, however, has not impressed economists much.  

When asked whether he would be revising his forecasts from 12.5 per cent contraction in the economy for 2020-21, former chief statistician Pronab Sen replied in the negative. 

Elaborating, he said, "What are green shoots? You are looking at economic performance (in comparison) with the immediate past, but GDP calculations are based on activities in the corresponding period of the previous year. If you do that, you will still be running a negative."

In any case, understanding why green shoots appeared in the economy compared to the last two-three months is a no brainer, said Sen, who is now the country director for the India Programme of the International Growth Centre (IGC). 

"You had a lockdown, now you have removed the lockdown. Of course, you will have growth. In economics there, is a term called 'dead cat bounce'.  It means that when you hit rock bottom, you rebound for a while and then you gradually sink back and then start recovering much later. And that is my prediction," he said. 

Sen said his prediction is that the first quarter of this fiscal will witness 25 per cent or worse contraction in the economy, maybe 30 per cent. 

The second and third quarters will each record declines of about five per cent in the economy, he said. The fourth quarter may actually be small positive, while the first quarter of the next year will be large positive, Sen said.

"It will then sink back into negative territory. The whole of 2021-22 will be negative if nothing is done this year or early next year," he said. 

Sen said what is not getting corrected is loss of income. 

"People have taken a massive loss of income. This year, many will be drawing down on their savings. When the income starts rising after the fourth quarter, people will not spend that money, but will rebuild their savings," he said. 

Sen said, "What is important for you and me is not the growth rate, but whether or not I am able to go back to the level of GDP that I had last year."

Aditi Nayar, principal economist at Icra, in fact saw downward  risks to  her projections of five per cent economic contraction for the current fiscal despite green shoots. 

"We await additional data to reassess the extent to which our baseline forecast that Indian GDP would contract by five per cent in FY21 needs to be revised downwards," she said.

Her projection had assumed lifting of the lockdown restrictions in Q1FY21. "While we have entered the unlock stage, Covid-19 infections continue to rise. Localised lockdowns being imposed in some states and cities suggest that the recovery that was expected to set in from the second quarter of FY21 onwards, is likely to be delayed," she said.

"The growing likelihood of continuing labour-supply mismatches in major production centres, behaviour changes and deferral of discretionary consumption amid continuing economic uncertainty, pose downside risks to our baseline forecasts for the rest of the fiscal year," Nayar added. 

Another risk is the restraint on government expenditure as a response to the continuing revenue shock faced by the Central and state governments, even as targeted expenditure has been announced by the former, she said. 

Icra had, in early May, widened its projections on economic contraction to 16-20 per cent in the first quarter of the current fiscal, from its earlier estimates of 10-15 per cent. 

D K Srivastava, chief policy advisor EY, projected the economy to grow by close to two per cent in the current financial year. He was among the few economists who predicted positive GDP growth for FY21. He said he had taken green shoots of recovery into consideration while projecting GDP growth.

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