The just released first quarter economic growth report is an indicator of economic recovery. But that is not all. The National Statistical Office has reported that India's Gross National Income grew by 20.1% in April to June quarter of this financial year compared to minus 24.4% of the last year's same period. It has also reported its Gross Value Added grew by 18.8% in the same quarter. One has to consider sustainability of economic activities for several quarters to come to a proper assessment. What does economic revival mean? Does it only mean achieving the pre-pandemic growth rate? Or one needs to consider employment generation to such an extent that the private consumption level reaches such a level that the economy can experience generation of highly effective demand which in turn pushes the economy to a higher economic trajectory?
Can India reach the pre pandemic GDP level in the present FY?
In 2019-20, India’s GDP was `146 trillion. In the last FY, that is, in 2020-21, India’s GDP fell to ` 135 trillion. That means its GDP fell by 7.3%. In the current FY, that is, in 2021-22, the GDP is expected to grow back to ` 146 trillion - if it can grow by 8.3%. Assuming 6% growth, had the situation been normal, India could produce a GDP of 149 trillion by the end of the FY 2021-22. But many government representatives and a few economists have been talking of a ‘V’ shaped recovery. Many observers, on the other hand, believe in achieving a ‘K’ shaped recovery if there has been at all any recovery in the last few quarters. That means if India recovers shortly, it would achieve that recovery on the basis of growing inequality. That means there would be a rise in GDP. But the bigger portion of it would go in favour of a section of fortunate people. The majority of the population would remain out of the ambit of that growth.
Some signs of recovery are highly projected
The growth forecast has been varying between 11% as per the government and 9.5% as per the RBI. CARE Ratings’ forecast has been 8.8% to 9%. Per month GDP may be rising from May to June to July with rising economic activities but that may not mean an overall recovery has been possible. Madan Sabnavis, Chief Economist, CARE Ratings has stated in an article published in the Indian Express on August 28, 2021 that one has to look into the September to December quarter’s GDP data as it covers the festival and harvesting season when people tend to spend more.
There are some indicators like Purchasing Managers Index (PMI) for manufacturing value. This should be judged by comparing it with the previous month’s value. The Index of Industrial Production (IIP) and core sector indicators look better. At present, exports data have been showing better results. But many observers think that the composition of exports is very limited like oil, engineering goods, cereals, gold and silver ornaments. That may not sustain for long. At the same time, one can remember that export fell by 17% last year. So a low base is also an important element. GST collection has been satisfactory. It is also a sign of higher consumption. But it may not be the entire story. If high GST collection is at the cost of the unorganized sector’s production level, it may go against economic recovery.
The most important indicators have been employment generation and bank credit
First, employment generation is important as an indicator of economic recovery as more employment generation means the generation of demand. That means more private consumption expenditure in the economy. One should know that private consumption has the biggest contribution (as big as 55%) in the total expenditure side of the Indian economy. Moreover, the level of output or GDP of an economy is determined, according to John Maynard Keynes, by the level of demand in the economy. So higher demand generation will help to achieve economic recovery.
Secondly, the other important area is the financial sector or more specifically - bank credit. Higher bank credit means more expansion of production as well as bigger gross fixed capital formation (GFCF) in the economy. The private investment expenditure is the second biggest expenditure head in the Indian economy. At present the growth of bank credit has been as low as 5.5% or so. It had been more than 14% in January 2019. Before that, it had been much higher. But the banks are now flushed with cash but the demand for credit remains low. As a result, about six lakh crore rupees per day are parked by the banks to the RBI at the specified repo rate. Another important fact is that the gross fixed capital formation now means an increase in future productive capacity. So low GFCF slows down economic prosperity.
Thirdly, government spending has been also slowing down after a few months of high expenditure in the last FY. It is known that the volume of government expenditure is the third most important part of national expenditure. India Ratings very recently pointed out that the consumption demand story did not look encouraging even from a medium-term perspective, with only exports being the bright spot. The agency has revised India’s growth forecast to 9.4% in FY 2021-22 from its earlier estimate of 9.6%. The reasons behind this, according to the agency, are muted wage growth, rise in health expenditure and decline in household savings coupled with high consumer inflation.
The role of agriculture
It is often discussed that good performance of agriculture has saved the Indian economy during the first wave of the pandemic. It is true that the GDP of agriculture has been close to 4% in FY 2020-21. It is also expected that in the current FY, agriculture will maintain its status as rainfall is sufficient - as of now. But one thing is important here. Good agricultural production and agricultural GDP are not the same. When output is marketed against price, that is, when products are sold and price is realized, it comes under GDP calculation. It is known that a huge quantity of different agro products were not sold in the market during the first lockdown. A considerable portion of that was either destroyed or sold at throw away prices. The rural sector was also in a critical state in the last FY. In the first lockdown phase, the supply chain of agro products were completely shattered.
Agriculture sector itself in deep crisis
The agriculture sector employs a larger share of India’s workforce but its share in national income is relatively much lower. Moreover, almost 85% of the operational holdings belong to small and marginal farmers. Several studies have observed that there has been a decline in farm incomes over time. Majority of farm households are incurring insufficient income in comparison to their consumption requirements. As a result, more and more farmers have been relying on informal and formal credits and many of them fall into the debt trap. Therefore, depending solely on the agricultural sector for reviving the Indian economy is a long shot. As rural people cannot depend on agricultural income alone, more and more farming families are looking for separate income sources. These non-agricultural sources include small trading, opening shops, small contractor jobs, small construction work, involvement in micro and small industries. The non-agricultural income sources have been highly impacted by the pandemic.
The agriculture sector alone cannot take the responsibility of reviving the economy as the sector itself has been in a prolonged crisis. But it has maintained, to an extent, its usual position during the pandemic. This resilience of the agricultural sector helped the Indian economy to survive the initial turmoil posed by the pandemic. However, to revive, the Indian economy must rely on growth of other sectors as well.