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Relaunching growth: India misplaced in the global context



Even if we look at it in terms of growth on a quarterly basis, the picture is the same, with Indian growth down 69.4% and Perus down 72.4%.Even if we look at it in terms of growth on a quarterly basis, the picture is the same, with Indian growth down 69.4% and Perus down 72.4%.

When the first quarter GDP figures came out, there was a rather unnecessary controversy that showed a series of data where the US economy has shrunk by more than 23.9% in India. IMF data subsequently clarified this anomaly. More importantly, as nearly six months have passed since the lockdown was imposed, it may be time to introspect the concept of shutting down the economy in the context of the pandemic. The fall in GDP in the first quarter may well be the proverbial tip of the iceberg.

When the lockdown was announced in March, it seemed like the right thing to do, because everyone was doing it. India can be proud of the approach which is so strict as to be quite draconian on the weakest sections, both with regard to unemployment and to millions of people and subjects them to physical hardship in the process of migration. Still, it didn’t go according to script.

This was justified by the overview, which had to be seen. The government’s initial response was a positive take-up despite the contradictory position taken at the state level. But after a while the financial numbers hurt, and the support was more the financial system that could help those that were operational but not the units that had closed. And just when it seemed like the state could no longer support the people, the unlocking process began in stages. Today we are in unlock phase 4 and there will definitely be a fifth release coming next month. Ironically, India is the only country which has not seen the flattening of the curve and which has the highest number of cases of infection per day. Still, the drive is to open up the system in stages, and anyone can guess the future of the spread of infection.

After the initial expectation that the total lockdown would stop the spread of the virus, the realization was that we have to live with these conditions and adapt. In the process, the economic system has been mutilated to a great extent, especially when viewed in the global context.

The recent published GDP figures highlighted the fact that India was more affected than any other country. The data published by The Economist magazine, where there is standardization of the data presented, is a good benchmark. GDP growth for the first quarter of FY21 or the second quarter of the calendar year was the second weakest in a set of 42 countries, with only Peru recording a worse situation at minus 30.2%. The others which moved closer to India were Spain with minus 22.1%, the United Kingdom with minus 21.7% and Mexico with minus 18.7%. Interestingly, the degrees of foreclosure for these countries were different, with none of them being as strict as India.

Even if we look at it in terms of growth on a quarterly basis, the picture is the same, with Indian growth down 69.4% and Perus down 72.4%. This concept, it will be remembered, became controversial with the IMF which intervened to clarify because the growth rate in the United States was minus 31.7%, which was on this criterion and not over one year.

This decline in growth must be seen in the perspective that when the foreclosure was introduced and the IMF released its growth forecasts on April 6, India and China were among those growing at positive rates this past. year. Therefore, this is a reduction compared to what had been projected earlier.

The scenario turns bleak when the picture of inflation is juxtaposed as the CPI index shows 6.9% for July and 6.7% for August, which is one of the highest figures, only Pakistan and Argentina overtaking it. The first reaction from an economic point of view is whether these are signs of stagflation that characterized the world economy at the time of the oil shock of the 1970s. The answer is that these numbers look like the same thing because growth is more likely to continue to be on negative ground over the next quarter for sure, and inflation developments will be largely driven by the kharif harvest, with food inflation having been a problem. for us today. While 6.9% isn’t scary, it still looks uncomfortable, when placed with such a sharp drop in growth. Part of the inflation is because the government has also increased taxes on petroleum products and given that most of it is on the supply side it smacks of stagflation.

The third indicator where the situation is complicated is unemployment, where the figure of 8.4% is the highest, which is consistent with the sharp drop in GDP. Here, too, unemployment data fails to capture the unorganized segment, which has been hit harder by the foreclosure. Unemployment, however, has been higher in countries like the United States, Spain, Greece, Argentina, Brazil, the Philippines, Turkey, Colombia, Egypt and South Africa . But for most of those countries, that rate was high even in the pre-Covid-19 era. The exceptions were the United States, the Philippines and Chile.

The fourth set of data concerns the budget deficit. There are projections made by The Economist based on the developments that have taken place so far on the likely level of the budget deficit for the year. Here, for India, the forecast is 7.9%, which is quite conservative compared to that of the others (see graph).

This is an area that can be improved by India. In such a situation where growth is low and unemployment naturally high, the economy falls into a low equilibrium trap. The only way out is the Keynesian push, especially in these rather difficult times when the private sector is still struggling to see demand growth. In fact, the private sector has been affected by both supply disruptions and low demand conditions, which can only be overcome with positive government action. To be sure, the government has so far taken the cautious path and, with the decline in GDP growth, it has encountered a major revenue deficit, which translates into a higher deficit.

But a fiscal stimulus can be considered opportune in these conditions because there is no other way out. Growth is something out of our control today, which also means jobs will be a challenge for the rest of the year. This problem is not endemic in India and is true everywhere. The signal that can be drawn from global experiences is that a budget push right now is the best bet and would not be interpreted negatively by multilateral agencies. Leaving it to the private sector would take time and the interim period before recovery would be even more difficult.

The author is Chief Economist, CARE Ratings. Opinions are personal

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