'State of Economy Far Worse Than Govt Admits, GDP Shrank by More Than What Govt Claims'

Professor Arun Kumar tells Karan Thapar his calculations show that in Q1, GDP shrank by 50% and not 23.9%, and in Q2 GDP shrank by 25% and not 7.5% as the government claims.

New Delhi: In an interview that will come as a shock to most people and will probably be strenuously refuted by the government, one of India’s highly regarded economists has said that this financial year GDP will shrink by 29% whilst the Central government’s fiscal deficit will cross 15%.

Speaking 48 hours before the presentation of the budget, Professor Arun Kumar, the Malcolm S. Adiseshiah Professor at the Institute of Social Sciences and earlier professor at Jawaharlal Nehru University, says that his calculations show that in Q1, GDP shrank by 50% and not 23.9% as the government has claimed.

In Q2 GDP shrank by 25% and not 7.5% as the government claims.

He also says that in both Q3 and Q4 GDP will shrink by 10% each. Professor Kumar also says that the fiscal deficit of the Central government, inclusive of off-budget items, will be over 15% whilst the combined fiscal deficit of the Central government, state governments and PSUs (what is often called the public sector borrowing requirement) will exceed 20%.

In a 36-minute interview to Karan Thapar for The Wire, which will go up on The Wire’s website by this evening, Kumar, whose book on the Indian economy’s present crisis called Indian Economy’s Greatest Crisis was recently published, says there are two key reasons why the government’s estimate of the state of the economy is so sharply different to his.

First, the government projected Q1 and Q2 results not on the basis of the data it normally uses but on the basis of other data sources which were largely new. The government itself admits that these are limited and will undergo revision. This means the results for this financial year’s Q1 and Q2 are not comparable with each other and, furthermore, you also cannot compare Q1 and Q2 of this year with Q1 and Q2 of the last financial year. Consequently, we do not have a legitimate and credible way of estimating the difference in performance between Q1 and Q2 this year compared to last year. As he put it, we are comparing apples with oranges and what we have are guesstimates.

Professor Kumar also says that these guesstimates will not improve because data which was not available or not collected earlier cannot be obtained later. This further means that we are estimating the speed of economic recovery on the basis of guesstimates and cannot be sure how accurate that guesstimate is.

Also read: India’s GDP May Contract by 7.7% in FY21: Government

More importantly, Kumar says the government does not have a credible way of estimating what has happened to the unorganised sector. Traditionally the performance of the unorganised sector is judged by using the performance of the organised sector as a proxy. Even in normal years this is unsatisfactory. In recent years demonetisation and GST have made the disjuncture between the organised and unorganised sectors worse. The lockdown exacerbated it further.

A woman walks past closed shops at Janpath market in New Delhi, April 14, 2020. Photo: PTI/Vijay Verma

Kumar says after demonetisation and GST “the higher growth rate of the economy actually masks the decline in the unorganised sector”. In other words, the better the economy as a whole seems to be doing the worse the unorganised sector is performing.

The lockdown, Kumar says, aggravated this tendency of overestimating GDP. Equally importantly, the problem has continued after the lockdown started being eased. As he puts it, “more of the organised sector was able to start business but not the unorganised sector”. This means that the disjuncture between the two has further widened.

It’s because the government has not been able to properly appreciate the worsening of the disjuncture between the organised and unorganised sectors and, therefore, accurately establish what has happened to the unorganised sector that government figures for GDP performance are so markedly different to his.

Kumar told The Wire that in the first month after the lockdown i.e. April, the economy shrank by 75%. Only 25% of the economy was functioning. He believes the government has not appreciated the extent of the damage that happened in the first month.

Kumar also said that the government’s estimate that agriculture grew by 3.4% in Q1 is wrong. He believes that in April and May agriculture shrank by 20%. In June, because of Rabi harvesting, it recovered somewhat. However, overall in Q1 agriculture would have shrank by 10%, not grown by 3.4 as the government believes.

Kumar added that he believes GDP will return to pre-COVID-19 levels by December 2021 in terms of size. In terms of growth it will return to pre-Covid levels around August 2022.

Watch the full interview here.