GDP shrinkage: It wasn't just Covid-19 lockdown that brought us here

GDP shrinkage is the cost of continued virus spread

The National Statistical Office has now released its estimates of gross domestic product (GDP) for the first quarter of the ongoing fiscal year, 2020-21. The months between April and June coincided with the height of the initial lockdown imposed by the Union government to deal with the spread of the pandemic, which severely impacted economic activity. Most predictions for GDP were that it would contract by 19-20 per cent, year-on-year, for the quarter as a response. In fact, the compression was more severe in the first estimates — 23.9 per cent at constant prices. This is unprecedented in India’s recent economic history. GDP growth had not slipped into negative territory in four decades. India’s contraction in these numbers is sharper than that for most of its fellow G-20 countries; only the United Kingdom’s 20 per cent contraction comes close.

The numbers, however, should be seen in context. The fact is that this is an unprecedented pandemic, which required unprecedented measures, which have, in turn, had unprecedented effects on the economy. This is not the time to panic; but there is certainly every reason for stocktaking, and a re-evaluation of relief and revival measures. So far the government has wisely determined that all-out spending in a futile attempt to revive the economy would be a bad idea. That logic has not changed; it must stay the course. The gradual re-opening of the economy over the months since July will have had a positive impact on the economy; the second quarter of 2020-21 may also see a year-on-year shrinkage, but it is unlikely to be as much as was seen during the peak lockdown quarter. This print of GDP also should be seen as extremely tentative, as data collection was incomplete and difficult due to lockdown restrictions. More precise estimates of the shrinkage could be even greater.

The decomposition of the numbers reveals the manner in which the lockdown affected economic activity. Government expenditure at constant prices continued to increase, and composed 18 per cent of GDP in April-June 2020 as distinct from almost 12 per cent in the equivalent quarter of the previous year. But both private consumption and gross fixed capital formation crashed — the latter by 47 per cent year-on-year. Animal spirits are at an all-time low; the Reserve Bank of India’s consumer confidence index dipped to 53.8 in July, when it stayed at 90-100 for years prior; and the business assessment index is similarly impacted. Given the confidence effect, it is clear that the economic impact is not caused only by the lockdown. It must be recognised that the pandemic itself is causing uncertainty among consumers and companies — and so there is no easy way for the government to spend its way out of the problem. This is a public health crisis and must be tackled as such. The central problem for any planned recovery is that India is still reporting high Covid-19 case growth. Until the virus’ spread is brought under control, full recovery is out of the question; the fear of both unexpected lockdowns and closures and of health issues is constraining spending and investment. The government cannot counteract that. It must restore focus to controlling the pandemic.