India’s tryst with recession 40 years ago

NEW DELHI: So far, India has had five instances of recession or real GDP contraction since the nation's independence in 1957-58 (-1.2%), 1965-66 (-2.6%), 1966-67 (-0.1%), 1972-73 (-0.6%) and 1979-80 (-5.2%). With farm sector accounting for the dominant share of GDP, and given weak external balances, most recessions were earlier driven by severe droughts or high international energy prices.

The GDP data for the June quarter of FY21, due later today, would reveal the extent of damage the coronavirus pandemic has caused the Indian economy. While India’s economy had been slowing down well before the pandemic hit it, Asia’s third largest economy is expected to fall into a recession in FY21 for the first time in 40 years.

In 1979-80, the Indian economy faced a double whammy with a severe drought gripping most of the country and crude oil prices almost doubling due to supply disruptions because of the Iranian revolution against the state’s monarch. After two remarkable years of good rainfall, the drought in the kharif season in the grain producing states of the country led to decline in agricultural production by 10%. The sharp rise in petroleum prices also led to flare up of inflationary pressure with wholesale price inflation soaring 20%.

The year coincided with a change in the government, with the fall of the 33-month old coalition government under the Janata Party. In the 7th Lok Sabha elections in 1980, Indira Gandhi came back to power for the first time after emergency with a massive mandate. Finance Minister R Venkataraman presented the interim budget on 11 March, 1980 and then the full year budget on 18 June, 1980.

In his interim Budget for 1980-81, Venkataraman blamed the Janata government for the economic misery of the country holding that "instead of building further the strong and resilient economy which we had left behind in 1977, they have allowed it to drift, through inaction and mismanagement, into stagnation." Venkataraman said the state of the economy is such that the government will need “some more time” to assess the damage suffered by the economy to evolve a coherent medium-term strategy for revival and restoration of its health.

In his regular budget for 1980-81 presented in June, Venkataraman said the most important and disconcerting fact about the Indian economy is that GDP declined in 1979-80 due to contraction in agricultural as well as industrial production. “The set-back in agriculture was partly on account of the severe drought which affected large parts of the country. The decline in industrial production was mainly the result of a serious deterioration in the infrastructure,” he added.

Realising the critical role exports play in a country’s development also in view of the deteriorating balance of payments situation, the Budget proposed to establish Exim Bank and shifted its attention to import substitution. “It is necessary to minimize, the growth of imports through a much more energetic policy for augmenting domestic production in areas like edible oils, steel, cement, fertilisers, oil and oil products,” Venkataraman said.

RM Hanovar, then chief economic adviser in the finance ministry, in the Economic Survey for 1979-80 called for restraint in the common practice of deficit financing in those years. “In this situation fiscal policy must balance effectively between expenditure restraint and deficit financing. Deficit financing was particularly high in 1978-79 and 1979-80, and this contributed to the inflationary pressures in the economy,” he said.

Hanovar had advised that the quantum of deficit financing should be well within the tolerance limits of the economy. “If deficit financing is used injudiciously financial targets may be reached but physical targets may not be achieved owing to an erosion of resources. It would be preferable to plan for more realistic targets so that cuts in real expenditure are made in a rational and controlled manner rather than through uncontrolled price increases,” he added.

After discontinuing the practice of deficit financing in a historic agreement with Reserve Bank of India in 1997 from 9th Plan onwards, the government may again opt for the nuclear option given the revenue-expenditure dynamics under the shadow of a yet unfolding pandemic.