Published: August 30, 2020 7:26:16 am
Migrant workers return to New Delhi from parts of Uttar Pradesh on August 10, 2020. In large numbers, the workers had left the city due to the Covid-19 shutdown. (Express photo: Praveen Khanna)
Dear readers,
Next week is critical for the Indian economy. Tomorrow, August 31, the National Statistics Office under the Ministry of Statistics and Program Implementation will release the GDP estimates for the first quarter (April, May and June) of this financial year.
But before I explain what to look for in the GDP data, let me recap what happened in the week that just ended because it will provide the context for the GDP figures.
This week there were two major events.
One was the publication of RBI Annual Report for 2019-20. The first thing to keep in mind is that the RBI annual year is different from the regular financial year. For the central bank of India, the 2019-20 annual report is for the period from July 1, 2019 to June 30, 2020.
This otherwise superficial fact is relevant this year because the RBI year included the first quarter (April, May and June) of the current financial year. This is the quarter that saw the maximum disruption to economic activity and as such everyone wanted to know what RBI did in this period.
Unfortunately, the RBI refrained from providing us with a clear figure for GDP growth or contraction, but stated that “an assessment of aggregate demand over the year so far suggests that the impact on consumption is severe, and it will take a long time to repair. and recover the momentum before COVID-19 ”.
Equally sinister were the words of the Prime Minister of Maharashtra, Uddhav Thackeray, who, while speaking to the top ministers of other states not governed by the BJP, suggested return to pre-GST regime. Thackeray was responding to a GST Council meeting where the Union government expressed his disability pay the compensation amount – approximately Rs 2.35 lakh crore – which was owed to the states under the GST regime.
This suggestion could have far-reaching ramifications for the economy if it is followed seriously by some of the larger states.
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As different states try to recover from the impact of Covid, they need money, but the current GST regime has robbed states of the freedom to raise or lower taxes. The fact that money was being borrowed from the market rather than from the Center has made Thackeray question the appropriateness of the current GST regime. (Don’t Miss Explained: GST Compensation Issues)
There were three other major events that deserve attention.
One was the launch of Niti Aayog’s Export readiness index, which ranked the states of India.
The best performers were mostly coastal states like Gujarat, Maharashtra, Tamil Nadu, and Odisha, but there was one landlocked state that managed to sneak into the top 5 list and it was Rajasthan.
At the other end of the spectrum were mostly landlocked and Himalayan states like Jammu and Kashmir, Bihar and Assam. But West Bengal stood out as 22nd out of 36 states and UT despite being a large coastal state.
A crucial conclusion of this report was the need for states to work on their unique strategy to boost exports. This again ties in with Thackeray’s demand for greater leeway.
Then there was a report from McKinsey Global Institute which stated that India will have to create at least 90 million non-farm jobs over the next decade (145 million at the top end) and for which it would have to grow between 8 and 8.5 percent each year (see chart below).
Source: McKinsey Global Institute
Finally, on August 27, the World Bank issued a statement saying that it ordered a “systematic review” and an “internal audit” of its data and methodology used to compile the Ease of Doing Business rankings in 2017 and 2019. response to various allegations that the data was modified for political reasons and to favor some countries. It is important to note that India’s ranking improved from 142 in 2014 to 63 in 2019.
All the concerns of the past week, from falling domestic consumption to declining exports and mass unemployment and question marks about India’s Ease of Doing Business ratings and the GST regime, provide a useful bridge to next week’s big event.
Coming to the GDP figures for the first quarter to be released tomorrow.
This quarter saw the tightest lockdowns across the country and is likely to see the steepest drop in economic activity in a long time.
The composition of growth (or decline), in other words, which sector was most affected, will set the tone for the rest of the year. The amount and nature of the damage will indicate the type and magnitude of fiscal and monetary policy efforts required to revive the Indian economy.
Most analysts expect the economy to contract sharply. But the expected magnitude of the contraction differs, sometimes substantially in specific sectors of the economy.
For example, Saumya Kanti Ghosh of the State Bank of India expects the GDP contraction to be 16%, while Madan Sabnavis of CARE Ratings expects it to be around 20% and Aditi Nayar of ICRA Ltd expects an even greater contraction of 25%. %.
Beyond the variation in overall growth figures, if specific sectors are compared (see charts below), two broad trends can be found:
- that it is probable that the industry, the construction, the commerce and the hotels, etc. have been the most affected (highlighted in red),
- that agriculture and public administration (i.e. government) would have done quite well (highlighted in green)
Source: CARE Ratings
There is less consensus on what is likely to have happened in sectors such as mining and quarrying and electricity and other utilities (highlighted in blue).
Source: SBI
If you’ve been following GDP projections for the past year, you’ve surely noticed its increasingly shorter lifespan. For example, in July of last year, when Finance Minister Nirmala Sitharaman presented the annual budget, she noted a real GDP growth of 8%. But with each passing month, the projections continued to narrow as the underlying economy slowed faster than expected. Finally, India ended the year with just 4%.
This financial year, of course, making these estimates and projections is even more difficult because the Covid spread in India has been much worse than the government expected. In the early days, the government did not expect new cases after May 16. In reality, India not only added around 5,000 new cases on May 16, but also revised China’s total count of more than 80,000.
As India has tried to open up for work, Covid cases have increased. This week, India recorded the highest count of new Covid cases in a single day globally and is now the third most affected country on the planet. Most concerning is that the rate of spread of Covid in rural areas of India is almost twice the rate of spread in urban areas.
All of this points to uncertainty about the shape of the economic recovery. In this context, Monday’s data would provide the first benchmark around which future analysis can be performed.
Stay safe!
Udit
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