Slowdown, then pandemic

GDP data shows virus hit an already weakened economy

The National Statistical Office last Friday released its provisional estimates of gross domestic product (GDP) for the fiscal year 2019-20, as well as its quarterly estimates of GDP for the last quarter, January-March, 2019-20. The headline estimate, for the year 2019-20, is low by Indian standards but not as low as many feared: Growth in 2019-20 at constant prices would be, according to the statisticians, 4.2 per cent, as distinct from the over 6 per cent growth registered in 2018-19. The slowing in nominal GDP growth is even sharper.

The quarterly numbers were being carefully watched to see what the impact of the novel coronavirus pandemic would be. Given that the nationwide lockdown was announced only towards the end of March, that itself would not impact the numbers enormously; but state-level lockdowns had begun to be imposed a little earlier, and of course the pandemic had already begun to affect supply chains by then, particularly those that relied on China. The index of industrial production in March 2020 had contracted almost 17 per cent year on year, after small expansions in the previous months. Given these concerns, the last quarter’s GDP growth of 3.1 per cent was not a surprise. Overall, these numbers would suggest that the immediate effect of the pandemic on India’s economy is not as worrisome as elsewhere.

Yet jumping to that conclusion would be a mistake. There are several points to be noted. First, the impact of the stringent national lockdown will really be evident in the numbers for the April to June 2020 quarter. Second, there are considerable statistical questions to be asked about the last quarter’s numbers, which might lead to large downward revisions in the estimates in the near future — senior government statisticians have said as much explicitly. Furthermore, it is clear that the pandemic hit an economy that was already showing distinct signs of weakness and a slowdown. In particular, gross fixed capital formation (GFCF) has been in crisis over the 2019-20 fiscal year, shrinking in several quarters. Without investment there can be no growth. Government spending has primed the growth pump in recent years, but it is running out of fiscal headroom now. Recovery from Covid-19 is therefore doubly difficult, as the economy is structurally weak at the moment and the government is already resource-constrained.

The short-term outlook for the economy depends upon the pace and nature of the re-opening. Even China is still operating at about 90 per cent after ending its strict lockdown; there is every expectation that economic activity will be at a lower level during the course of the pandemic. Thus a snap-back to previous levels of production — a V-shaped recovery — might be too much to expect. Aside from the course of the pandemic, however, there are other considerations when it comes to the longer-term outlook. High among them is whether the government carries through on its promise of structural reform, which could attract investment, particularly to manufacturing. Given the banking crisis and the strains on public finance, foreign investment in productive assets in India becomes a necessity for stability and recovery. Given that the long-term slowdown of the economy has now been exacerbated by the pandemic, there is no alternative to painful structural reform.