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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

The policy adventurism that has led India to its economic woes

Moves made without preparation may have contributed more to our GDP contraction than covid

The much-awaited gross domestic product (GDP) data for the first quarter of this fiscal year has confirmed the worst fears of policymakers. The decline in GDP of 23.9% is the worst among major economies. The largest contractions were in construction (-50.3%), trade, hotels, transport and communication (-47%), and manufacturing (-39.3%). These together account for three-fourths of all non- agricultural employment in the country and 43% of all workers. Their sharp contraction has implications for wages and employment, particularly at a time when the economy is suffering from a demand contraction. Not surprisingly, most forecasters now estimate a decline in GDP of more than 10% this fiscal year.

Finance minister Nirmala Sitharaman was quick to attribute the decline to covid, which she had described as an “act of God". There have also been premature celebrations of green shoots and a V-shaped recovery, none of which is visible in available data. While the pandemic did contribute to the economy’s contraction to a large extent, it would be an exaggeration to blame the shrinkage entirely on it. The fact is that gross value added (GVA) in the manufacturing sector has contracted with increasing magnitude in the last four quarters. Construction has been contracting for three quarters. Even trade, hotels, transport and communication, as a group, has seen its GVA decelerate. The economy was slowing down sharply even before the pandemic hit, with India’s official GDP growth rate decelerating from 8.2% in the fourth quarter of 2017-18 to 3.1% in the same quarter of 2019-20. In other words, had we not been hit by the pandemic, last quarter’s growth would still have been barely positive, at best.

The deceleration of the last two years had nothing to do with any exogenous shock, but was entirely a result of the government’s policy adventurism. Notable examples of it are the abrupt demonetization of late 2016 and a hasty roll-out of the goods and services tax (GST) within a year of that. These broke the backbone of three dominant sectors of the non-farm economy. It is no surprise that unemployment and distress in the economy have increased. These sectors are also the largest contributors to India’s informal economy, which bore the brunt of those policy shocks. Demonetization disrupted the operations of most enterprises in sectors that rely heavily on cash transactions. As did GST, by raising their compliance costs, and arbitrary revisions in the rates and regulations of the tax.

Last year’s tax waiver for India’s corporate sector of around 1.5 trillion was another example of policy adventurism that seemed to ignore the need to protect the unorganized sector. It is now clear that most of the organized sector used the largesse not to increase investments, but to balance their accounts.

The most recent act of adventurism was India’s sudden lockdown in March after the covid outbreak. While a lockdown was desirable and it did slow the transmission of infections, the strict restrictions imposed without either warning or preparation, and that too at a time when the daily case count was only a few hundred, were yet another example of the government’s shock-and-awe methods. India’s economy suffered much more on account of its lockdown than other countries, which imposed them gradually and in a relatively well-planned and localized manner. Once again, the move affected the unorganized sector much more than it did the organized sector. The latter was cushioned by the large cash balances of formal enterprises and also because these were able to function by shifting work to the homes of their employees. But this was not possible for most of the unorganized sector. It was precisely the same three sectors that took the hardest impact. Most of their enterprises were not just informal, they also had limited cash balances. The outcome was that millions lost their jobs and incomes, and many of them had to take long walks back to their rural homes.

While the government opened its purse to corporate entities months before the pandemic, it has seemed reluctant to help the unorganized sector. This has not only delayed an economic recovery, but also made it hard to tackle a humanitarian crisis.

The pandemic has struck everyone. No country is unaffected. What matters is the response to this exogenous shock. In the case of India, the way our policy has responded has resulted in our economy being impacted the hardest. But covid is not the only reason why the economy is in such a crisis. That is a result largely of the policy adventurism seen over the last three years.

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

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