What Should the Centre's Policy Response To the Quarterly Growth Catastrophe Look Like?

With a strategic vision in mind, the Centre should aim to boost consumption expenditure, incomes and private investment.

One would think that news of one of the world’s largest economies contracting by nearly 24% in the first quarter of 2020-21 would be the main talking point of discussion and deliberation across all platforms of media.

Unfortunately, that doesn’t seem to be the case. Such are the times we live in, when real issues seem to have little political and economic value as governments and political parties tend to act more like television production houses, busy creating prime time narratives (#JusticeforSSR) to ensure that the citizenry continues to stay deflected and distracted from issues affecting its own well-being for as long as possible.

India’s economic condition is in deep trouble. And, if there was any doubt one had on how bad the situation really looks ‒ now and in the months ahead ‒ just look at the numbers on Q1-growth released earlier this week. It is worth noting that quarterly growth figures are often subjected to substantive revisions over time, as more data sets come in from sectoral and state-levels and are factored to previous estimates. However, what is certain is how even an overall GDP contraction by 24% is an under-estimate at best.

Also Read: India’s GDP Shock: Modi Cannot Adopt a Business As Usual Approach

Why is that the case?

For one, this number alone doesn’t reflect the impact seen from a total decimation of India’s unorganised and informal economy, which constitutes the bulk of our economic activity and absorbs the maximum workforce.

Second, because we don’t have the gross state domestic product (GSDP) numbers produced quarterly for most states, one still doesn’t know the differential nature of severity in impact caused from the curfew-style lockdown across states (which bore the brunt of the economic cost). Third, if we simply take the government expenditure numbers aside from the released quarterly data (constituting around 16.4% of total expenditure), the contraction in GDP seems to come around 29.3%.

Two women walk in front of closed shops in Kolkata, August 31, 2020. Photo: PTI/Ashok Bhaumik

Growth propped by govt spending

This non-government GDP trend (at 29.3%) is important given how the main source of India’s growth ‒ even before the pandemic ‒ was based on a higher government expenditure, as private investment and consumption expenditure was already contracting from a deep demand-side slowdown. Now, given how poor the fiscal state of affairs already is, it seems highly unlikely that the Union government will do much to boost spending to stimulate growth.

What’s also strange is how, despite an increase in government expenditure for Q1, when one looks at the sectoral data for public administration and defence (where government spending is allocated at the highest weight), there was a negative growth of 10.3% registered for Q1, 2020-21. So, we don’t really know where and for what did the government spend on in this quarter.

In any case, the worst-case scenario might still not be over as some might imagine. The current quarterly data is for those months when the shutdown was most fierce and enforced in a curfew-style manner across country, but even now, as India keeps unlocking, the virus is spreading rapidly in parts of semi-urban and rural hinterland, presenting a grimmer economic (and public-health) future.

Watch: Salman Soz: Effects of Q1 GDP Contraction Will Be Felt For Years to Come

Not only did an intense (and pre-mature) lockdown destroy the base of our economy for months, what’s worse is it had little to do with actually addressing the public health response to contain the virus. Locking down was, unfortunately, seen as some magical cure to contain the virus.

Still, on the economic spectrum, one shouldn’t get too stuck on the current growth numbers alone, or by sectoral growth projections. Compared globally, even in the UK, months of lockdown (though not so intense as the one in India) contracted their economy by over 20%. However, their government was swift to realise the gravity of the problem then and undertook a massive economic relief program (through greater stimulus) to kickstart growth.

The Indian government should do the same and with a more strategic vision in mind. More than the actual fiscal capacity to spend, the directionality of measures taken ‒ in relative comparison to other nations ‒ to boost consumption expenditure, incomes and private investment, matters now more than ever.

A salesman arranges items in his shop in Bengaluru, Aug. 31, 2020. Photo: PTI/Shailendra Bhojak

Crisis of low productivity

It is worth realising that India has been facing a crisis of low productivity, which might make any temporal stimulus response ineffective. There is a need to understand the endemic concerns at play: the composition of demand (skewed towards the top 5% consuming class); a credit-freeze in the financial system (choked by rising NPAs); low wages in non-farm segments (worsened by problems of contractualisation); high gender inequality in the workforce (where more than half of the population that is female has a lower workforce participation rate than men), and a poor export demand volume for Indian goods and services. Adding to the woes is a broken, deeply fragmented labour market where labour productivity (and wages) is at its lowest threshold.

To get out from such a vicious cycle of low productivity-growth, no ‘Act of God’ is required, but a conscious need to acknowledge the seriousness of our economic woes. This should be supplemented by a medium-to-long term strategic plan that allows for greater government spending (as part of a counter-cyclical response) that is targeted to crowd-in private investment and a higher consumption expenditure amongst households and firms in sectors of manufacturing, construction, real estate, travel, tourism and services (those worst hit by the pandemic).

This also means that the Centre needs to take fiduciary responsibility, providing for greater revenue allocation and capital to states whose fiscal capacity has been adversely impacted by the tanking of GST revenues. The federal core of the Centre-state fiscal relationship is perhaps at its worst now.

Also Read: What the 23.9% Drop in Q1 GDP Tells – and Doesn’t Tell – Us About the Economy

Worker centric policy push

Further, to work towards increasing labour productivity, a more worker-centric policy push aimed at reducing contractualisation of workers, creating a higher-wage paying ecosystem may incentivise workers (especially those who reverse migrated) to move back into productive sectors (manufacturing, construction, services etc.).

A few policy measures to help workers are critical to help provide a more progressive social and economic future for workers. These include offering more socially-protected worker contracts (say, safeguarding health and unemployment insurances as benefits), implementing premium wage-rates (say, double for contractual hires as against others), extending the probation period to more than a year (to do away with the uncertain 5-5-5 system on short-term contracts), and incentivising the presence of unions for minority workers (gender, class, race).

Private-sector union density must also increase in medium to large-scale organisations to make the design of worker contracts more protective of labourers and fair to safeguard worker interests while enhancing the credibility of the employee-employer partnership.

Deepanshu Mohan is Associate Professor of Economics and Director, Centre for New Economics Studies, O.P. Jindal Global University