The Political Fix: The mirage of 20% GDP growth and India’s ‘unaddressed demand crisis’

The Political Fix:

The Political Fix: Anyone paying attention to the Indian economy knew that the Gross Domestic Product numbers coming in for the April-June 2021 quarter would not be easy to read, since they would be based on the 24.4% contraction seen in the equivalent quarter in 2020 when the country saw its first, harsh Covid-19 lockdown.

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Except, that is, for representatives of the Indian government who could be expected to parrot the old cliches – ‘the worst is over’ and ‘V-shaped recovery’ – no matter what the underlying numbers actually showed.

And indeed, that is what happened. India clocked 20.1% growth for the April-June 2021 quarter, despite that period coinciding with the devastating second wave.

But the massively positive headline number masked a tremendous amount of underlying pain.

A few figures tell the story:

The actual numbers of the April-June 2021 quarter compared to the the January-March 2021 quarter showed a 16.9% contraction, making it clear that the second wave hit the economy hard – only not as a badly as the first lockdown.

The actual numbers of April-June 2021 quarter were also 9.2% below the equivalent figures in the pre-pandemic April-June 2019 quarter, meaning the Indian economy is smaller today than it was two years ago.

Charts from the Hindustan Times and the Indian Express sought to illustrate this point.

This means the Indian economy still has some way to go before going back to the size it had attained in 2019, and only then can think of returning to a growth path.

Details embedded within the GDP numbers reveal how difficult that may actually be, in part because of the supply-side approach that the government has taken.

From Dilasha Seth’s report:

“The government’s expenditure has contracted in the first four months of the current financial year despite a surge in revenue, driven by tax collections, which may adversely impact economic growth as private investments are yet to pick up…

The government’s capex declined by 39.40 per cent in July this financial year compared to the same month in the previous financial year. It was way down, by 62 per cent, compared to July 2019-20…”

The Political Fix:  Elsewhere there are other worries. Gross Value Added in construction, for example, was higher in the April-June quarter in 2017 – four years ago – than it was in 2021. The same is true for the ‘trade, hotels, transport and communication services’ category, which represents significant employment. GVA in manufacturing for the quarter was lower than it was in 2018.

Only two sectors – agriculture and electricity utilities – are above the level of the pre-pandemic April-June 2019 quarter. Although exports per se have done well, in line with other countries emerging much stronger this year from the Covid crisis, net trade remains negative for India because of its reliance on imports. Private investment, which tends to account for a third of India’s GDP, as 17% lower in the April-June 2021 quarter than it had been two years prior.

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