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Last week, the National Statistical Office (NSO) released its first advance estimate of gross domestic product (GDP), which placed growth in 2021-22 at 9.2%, against a contraction of 7.3% in 2020-21. This was based on data for the first 7 months of this fiscal year and will likely be revised as data comes in for the rest of 2021-22. Data for the last two months, however, does not reflect the optimism of NSO estimates. They have not taken into account the economic disruption due to the current wave of the pandemic. Any euphoria, therefore, of a growth recovery based on these estimates will be premature. These may also be irrelevant for understanding the real state of the economy or for identifying economic challenges in the context of a recovery.

Growth rates, whether on a quarterly or annual basis, during the last two pandemic-affected years have shown large fluctuations, given the unpredictable nature of policy interventions such as lockdowns and restrictions on commercial activity. As data of the past two months indicates, India’s economy is still vulnerable and any claim of a revival, especially given the low base of 2020-21, will be misplaced. Relying excessively on GDP numbers is fraught with risk in normal times, and only more so in times of a large economic shock. In normal circumstances, economic disruptions get averaged out over a period of time, with the economy slowly settling at its usual trend of growth. What makes our recovery from the current episode of economic contraction challenging is that covid struck at a time when the economy was already in a downward spiral.

The slowdown in GDP growth from 8.2% in 2016-17 to 4% in 2019-20 was not an accident, but due to structural factors. That a large majority of people saw their real incomes decline, leading to a fall in consumption demand, was on account of structural changes. A decline in job creation and rise in unemployment was accompanied by changes in income and consumption. The consequences were visible, with the decline in private consumption resulting in excess production capacity and a drop in investment. This was also a result of the changing structure of production in favour of the formal/organized sector as opposed to the informal/unorganized sector. Some of it was driven by policy-induced shocks such as demonetization in late 2016 and the GST roll-out in mid-2017. Subsequent policy decisions like tax sops for corporates strengthened these trends. The rise in inequality was as much a result of these policies as it was a contributory factor to the slowdown. While it is not clear whether the impact of these shocks had fully played out before the pandemic, there is also little clarity on whether the economic shock induced by covid restrictions exacerbated these structural changes or reversed them.

Preliminary estimates from the NSO suggest that some of these trends have deepened over time. Between 2019-20 and 2020-21, real per capita GDP declined at 0.4% per annum, but real per capita private final consumption expenditure (PFCE) declined by 2.5% per annum. Numerous other datasets on wages, employment and earnings confirm the vulnerability of our economy to declining PFCE. During the same period, real investment increased at only 1.3% per annum, despite a push by the government for infrastructure spending. The pandemic may have accelerated the slowdown, but did nothing to change the direction of India’s economic shift.

While these highlight the limitations of supply-side interventions by the government, they also emphasize the limits of fiscal policy in obtaining an economic revival in the absence of structural reforms. Fiscal expenditure directed at the country’s most vulnerable along with infrastructure spending may increase demand, but they are unlikely to be of help if structural issues go unaddressed. Some of these contradictions are likely to worsen with rising inflation and an uncertain global economy.

For the government, the challenge is not only to ensure a revival of GDP growth, the traditional metric, but also make sure that it is broad-based. It will require policies that facilitate employment generation along with increases in the real incomes of a majority of Indian workers. But a larger agenda should be to begin the process of structural reforms to undo the damage done to the large majority of informal workers and enterprises. This will require policy changes that may not yield spectacular GDP growth numbers in the short run, but are essential if economic growth has to be sustainable.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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