September 13, 2020 7:56:41 am
Migrant workers who had left Maharashtra during the lockdown returned to the state when restrictions were eased. (Express photo by Pradip Das)
Dear readers,
This week began with several economists dating their revised expectations of GDP growth for India in response to official GDP growth data released on August 31. With the economy contracting more than most analysts expected, the reviews, be it India Ratings and Research, Goldman Sachs, ICRA or Crisil, were all negative in direction.
For example, Crisil in its September update (on the May assessment) indicated the following two main reasons: “With the peak of the pandemic not yet in sight and the government not providing adequate direct fiscal support, the risks to the lows from our previous forecast have materialized. “
In other words, in May, the two things that Crisil analysts feared could go wrong did go wrong.
One, Covid continues to spread unabated. Look at the three maps of India (Source: Crisil) with the number of districts reporting more than 1,000 cases. See how quickly the whole country is grieving. According to the most recent data, India is adding about 1 lakh of cases every day.
June data
Two, in May, Crisil had expected the government to spend an additional 1% of GDP on top of the 1.2% of GDP that was announced immediately after the shutdown. But this has not happened.
As a result, Crisil estimates that India will suffer a “permanent” loss of 13% of real GDP in the medium term. This is much higher than the average 3% loss that most other Asia-Pacific economies will suffer.
July data
The permanent loss implies that the economy will not be able to recover this value of GDP. A simple way to understand the permanent loss of GDP is to consider the loss of the economy due to the summer holidays that could not be taken this year or the three cuts that were subsumed in the fourth.
In terms of daily cash, this loss will be around Rs 30 lakh crore. Simply put, this period of economic turmoil will rob India of Rs 30 crore. To put this in perspective, the government has invested much less than Rs 3 lakh crore through the Atmanirbhar Bharat Abhiyan package in the economy.
August data
The following graph (Source: Crisil) shows what permanent loss looks like for an economy.
This strong economic contraction will manifest itself in massive unemployment and disguised employment. In this regard, I would highly recommend seeing Mahesh Vyas, Executive Director of the Center for Monitoring the Indian Economy (CMIE), during The Indian Express event explained detailing the state of unemployment in the country.
Vyas explained how serious is the labor challenge facing India. There is an existing group of more than 35 million (or 3.5 million rupees) unemployed in India. Since the pandemic broke out, up to 21 million salaried jobs have been lost and they are not likely to recover quickly.
Source: Crisil
But the number who are already unemployed does not take into account the millions who have “joined” the agricultural sector when jobs dried up in the rest of the economy. While counted as employees, these millions are more accurately characterized as disguised unemployment.
To this group of 35 million, India adds 2 million people of working age, that is, 15 to 59 years old, every month. But since we have a labor force participation rate (LFPR) of only 40%, only about 0.8 million seek employment each month.
The LFPR is the proportion of people in a population seeking work. It is calculated by adding the employed and the unemployed and showing them as a proportion of the total population. According to Vyas, around 40%, India has a considerably low LFPR compared to over 60% in developed countries.
But even with an undesirably low LFPR, in one year India needs to create around 9.6 million (or roughly 1 crore) of new jobs. So by the end of this financial year, with no more jobs being lost, India would need about 4.5 crore rupees.
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Now, CMIE data shows that between 2016-17 and 2019-20 the total number of people employed in the country remained stagnant: from 40.7 crore to 40.3 crore.
Therefore, it is unlikely that in the next few years, when GDP contracts or grows at a slow rate, job creation will occur at a rapid rate.
And yet every year at least 1 crore of young Indians will join the workforce demanding work.
Seen from this context, the other news on the Indian economy this week can be better appreciated.
On the one hand, with more and more workers joining the agricultural sector, the issue of Minimum Subsistence Prices, which are announced by the government, will become increasingly important. Indian agriculture was never profitable and is likely to be even less so now as more people depend on it.
As the protest in Haryana and Punjab may point out, farmers will increasingly want more support from the government, even as the government, facing a massive financial crisis, tries to reduce its payments to the agricultural sector.
In the non-farm sector, too, the central government’s preference to boost growth by providing more loans through banks, rather than spending the money directly as most economists suggest, is the main reason why the minister Finance Minister Nirmala Sitharaman said that even private sector banks will. they have to contribute to the implementation of government schemes.
This is quite a remarkable change in the stance of the government led by Narendra Modi, from Prime Minister Modi criticizing “telephone banking” in public sector banks to asking even private banks to push government schemes.
Stay safe anyway, because that’s India’s best chance to start an economic recovery.
Udit
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