Indian economic crisis deepened

Fears of deep recession or a depression increased

Many Indian economists believe that Indian economy is headed towards a serious crisis that Indians have never seen since 1979. Earlier, economists were talking about a possible recession in the economy. Now they are predicting something worse than a recession. They are talking about a possible depression.  

India has never faced a sustained long-term downturn in economic activity in its 73 years of existence as an independent country. But there is now every possibility that India is looking at a ‘depression’ for the first time in its history, a possibility flagged by several economists.

 Goldman Sachs predicts the Indian economy will shrink by 45% on an annualized basis this quarter, and suffer its most severe recession since 1979 this fiscal year, as the coronavirus pandemic wreaks havoc on many of its industries.

The banking giant's latest quarterly growth forecast, detailed in a May 17 note, is significantly worse than its previous estimate of a 20% decline. More positively, its economists expect the Indian economy to rebound 20% in the third quarter, compared to the current quarter. They then anticipate 14% growth in the fourth quarter and 6.5% growth in the first quarter of 2021.

Overall, Goldman's forecasts suggest India's GDP will slump 5% this fiscal year, which would be its steepest contraction since 1979.

This will be the most widespread contraction India has ever seen: GDP is a sum of income generated in various sectors of the economy. India has seen four instances of contraction in GDP since 1951-52. These took place in the years 1957-58, 1965-66, 1972-73 and 1979-80.

In 1980, agriculture had a share of about one-third in total value-added and more than two-thirds in employment. This has come down to less than under 15% and just above 40% respectively. This means that the current contraction will affect a much larger part of the economy, especially in terms of income lost.

However, several economists warn that the impact will likely be much worse. Surajit Das, assistant professor at JNU’s Centre for Economic Studies and Planning (CESP), puts a perspective to the situation.

“Since economic recovery does not happen overnight, economic activities in the next few quarters will also take some time to recover. Looking at GDP from an output and employment point of view, I would say you are looking at anything between a 15% and 22 % contraction,” he says.

According to India’s retail association, sales of non-essential items - such as clothes, electronics, furniture - fell by 80 per cent in May. The sales of essential goods - such as groceries and medicines have dipped by 40 per cent.

An independent countrywide survey involving 1,000 respondents carried out by research scholars at CESP found out that at least 80%  of them have put off plans of purchasing consumer durables (ACs, washing machines, TVs and other white goods), automobiles and real estate while also postponing domestic travel plans.

Veteran economist Arun Kumar in fact thinks the contraction of GDP in the months of the lockdown has been even more severe.

“I would say about 75 % of the GDP was wiped out in April and about 65 per cent in May. Exports, investment and consumption, all three engines of growth went into a tailspin,” says Kumar.

Kumar goes further in saying, “India would be the first country in modern history to face a depression. It would take at least three to four years to emerge out of it.”

“In the current fiscal, the GDP is set to contract by at least 30 %. My estimate is that from Rs 204 lakh crore, our GDP will come down to Rs 130 lakh crore. Tax to GDP ratio will fall from 16 per cent to 8 per cent. In such a situation, it would be difficult for the government to pay salaries or finance the defence budget.”

While economists have been saying time and again wage-led growth that will boost demand is the only way to remedy the situation, the government seems to think supply-side interventions will save the day. More demand leads to more output and profit and more employment. Unless the government wakes up to the reality that without aggregate investment there would be no change in demand, output and employment, the situation is likely to get worse.

Another economist Pronab Sen, former Chief Statistician of India in his detailed analysis of economic situation showed India’s economy will contract not just this year but also in 2021-22. That means not recession and depression.

The study says India’s absolute GDP is likely to struggle to even come back to the 2019-20 level by 2023-24, which is the last year of this government’s current term. “As things stand, and the government retains the 2020-21 expenditure budget for 2021-22 as well, it is likely that 2021-22 will witness a GDP growth rate of -8.8%. This is a frightening thought since it means that the country could experience a full-blown depression – the first in our history as an independent nation,” says Sen.

                                                               Khalid Bhatti