An economic disaster foretold

The reported contraction of the economy is likely an underestimate for reasons of omission and commission

September 16, 2020 12:15 am | Updated 12:20 am IST

 “The lockdown has disproportionately hit the non-agricultural unorganised sector.” A labourer works at the Delhi-Meerut Expressway in Ghaziabad.>AF

“The lockdown has disproportionately hit the non-agricultural unorganised sector.” A labourer works at the Delhi-Meerut Expressway in Ghaziabad.>AF

According to data released by the Ministry of Statistics and Programme Implementation of the Government of India on August 31, 2020, real quarterly GDP contracted by a whopping 23.9% between April-June 2019 and April-June 2020. This magnitude of real GDP decline is unprecedented since the country started publishing quarterly GDP estimates in 1996. This is an economic disaster, no doubt. But is a bigger one in the offing?

According to the Organisation for Economic Cooperation and Development, India’s real GDP contraction between April-June 2019 and April-June 2020 has been the largest among 13 large economies of the world. China is the only country which saw a positive growth of 3.2% in that period. However, even that reported contraction of the Indian economy in all likelihood is an underestimate for reasons of omission of statistical information and commission of policies of insidious intent.


Change in real GDP between April-June 2019 and April-June 2020 in 13 large economies of the world. Source: Eurostat and Government of India.

An underestimated disaster

The unorganised sector forms a significant part of the Indian economy. According to some estimates, it accounts for 45% of output and 93% of employment of the working population.

While data collection methods have undoubtedly improved over time, coming up with reliable estimates of value added in the unorganised sector is challenging. Typically, government statisticians combine information about value added per worker from enterprise surveys with information about employment from employment-unemployment surveys to generate estimates of output in the unorganised sector.

This methodology is applied in benchmark years in which the enterprise and employment surveys are conducted, typically once every five years. The benchmark estimates are only available for those years. For other years, the estimate of output in the unorganised sector is extrapolated from benchmark year estimates using information about other indicators like the index of industrial production, the wholesale price index, and tax collection. By its very nature, such a methodology generates doubtful estimates for non-benchmark years even in the best of times. They have become misleadingly unreliable due to the sudden shock of the lockdown imposed by the Central government to deal with the COVID-19 pandemic.

Data | India's GDP was on a downward slope even before COVID-19 wreaked havoc

The lockdown has hit the unorganised sector disproportionately hard, as did the previous shock of demonetisation. As a result, standard methods of estimating the output of the unorganised sector by extrapolation and quantifying its contribution to the whole economy overestimates the income generated by it during the pandemic. The actual situation is much worse. The benchmark estimates of output refer to some pre-COVID-19 year and information on other variables like tax collection has been rendered far less reliable for this period.

We are told that employment in the last quarter has increased somewhat, but these are mostly self-employed persons who have now returned to the market place but earn far less because customers’ purchasing power has significantly declined. While they can technically be counted as being employed in terms of working time, they can only be considered grossly underemployed in terms of income earned. And this gap between employment and earnings is likely to grow without injection of massive purchasing power by the government directly into the unorganised sector.

Can agriculture help?

The sectoral pattern of real GDP decline provides important information. The three sectors which contracted the most were construction (at -50.3%), trade, hotels, transport, communication and services related to broadcasting (at -47%) and manufacturing (at -39.3%). Large parts of the first two fall in the unorganised sector underlining how the lockdown has disproportionately hit the non-agricultural unorganised sector.

The only sector which did not contract was agriculture, and that was because of a good monsoon year. It grew between April-June 2019 and April-June 2020 at 3.4%. However, in the present circumstances, agricultural growth will not help much in economic recovery. Agricultural output has risen, but agricultural income will not rise correspondingly due to the same lack of purchasing power in the unorganised sector for buying agricultural products. We are likely to face again, perhaps on a bigger scale, the same obscene situation of foodgrains piling up while millions go hungry.

A still bleaker future

India’s economic woes did not start with the pandemic. Its economy has been slowing down for the last couple of years. The year-on-year change in real GDP for the economy shows that the growth rate of quarterly real GDP has been slowing down at least since the fourth quarter of 2017, declining from 7.6% in Q4 2017 to 3.3% in Q1 2020.


Year-over-year change in real GDP in India. Source: Federal Reserve Bank of St. Louis, and the Government of India.

Ill-conceived measures of the Central government have harmed the economy. In November 2016, demonetisation provided the first negative shock. The second one, in the form of the Goods and Services Tax in July 2017, came even before the economy had time to recover from the first shock. All this played out on the canvas of an economy where financial fragility was increasing due to unaddressed problems in the banking sector. Increasing financial fragility coupled with negative policy shocks halted the trajectory of rising growth, and the lockdown has sent the patient who was already ailing into a coma.

Can the economy recover in the foreseeable future? In theory, yes, but in practical terms, no. The reason? The government is not interested in averting an economic crisis for the poor. It is interested in ensuring that the handful of its industrialist friends do well irrespective of the state of the economy. And by all accounts they are doing well. Mukesh Ambani, who has now become the fourth richest person in the world, is only growing richer by the day; Adani too is progressing at a highly satisfactory rate, monopolising airport development. This rosy picture should not be spoiled by irrelevant facts like a 23.9%% contraction of the real economy.

And of course, more of the same is likely to come — not to transform but to strengthen this reality. The government has just declared in Parliament that it cannot pay compensation to the families of those migrant workers who died because it does not have the relevant data. Isn’t a bigger crisis in the offing?

Amit Bhaduri is former Professor Emeritus, Jawaharlal Nehru University, New Delhi, and Deepankar Basu is Associate Professor, University of Massachusetts Amherst

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