Chances of early economic revival slim, observes new study

As India continues to be hammered by the twin effects of the raging pandemic and its dire economic consequences, the prognosis for the economy turns bleaker by the day. While the recent release of Gross Domestic Product (GDP) estimates for the first quarter of the current year have already painted a depressing picture, more grimmer warnings of what to expect in the near future have emerged.

A recently released research paper, “Impact of COVID-19 Pandemic on the Indian Economy: A Critical Assessment,” published by the National Institute of Advanced Studies, Bengaluru, forecasts more grim tidings for the Indian economy in 2020-21.

Input-Output analysis

Using Input-Output (I-O) analysis, a classical but neglected tool in economics, originally developed by Nobel Prize-winning economist Wassily Leontief, R. Ramakumar and Tejal Kanitkar provide a range of estimates of the extent of the collapse of both Gross Value Added as well as of GDP.

Since the I-O framework allows a robust mapping of the linkages between the different sectors of the economy, the authors are able estimate the “direct” and “indirect” losses of output caused by the massive rupture to the economic system caused by the Covid-19 pandemic.

The authors told The Federal that the I-O framework was particularly useful because, unlike the usual growth estimation models, it captures better the linkages between the different segments of the economy. Moreover, the I-O matrix provides much better representation to informal sector activities. As is well known, informal activities have been particularly hard hit in the lockdown and its aftermath, just as they were hit by the demonetisation of 2016.

The authors have used an I-O matrix of 34 sectors for India for 2016-17 published by the Asian Development Bank. Admitting that the I-O framework from 4 years earlier may be restrictive, they defend the use of the I-O method for its utility in the context of a sudden exogenous shock. They point to the fact that similar analyses were made in the case of Japan following natural disasters.

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Quantifying the extent of “lost” output has been problematic, primarily because the Covid-induced impact on the economy has been unlike any other in the past. Unlike usual recessions, the current crisis has resulted in a sudden and simultaneous collapse of both supply and demand.

As a result of the suddenly enforced nationwide lockdown, considered to be among the harshest in the world, entire production chains, barring a few rudimentary ones, came to a standstill. It is significant that the Narendra Modi Government has not ventured to either quantify the extent of the “lost” output or provide a reasoned estimate of growth projections for GDP in the current year.

The authors also argue that the I-O analysis is a better method to estimate the extent of collapse because it reflects better the mesh of linkages in the Indian economy. This is especially so because the lockdown, apart from directly affecting sectors of the economy, also had indirect effects on production and demand.

As has been demonstrated by numerous anecdotes from across the country, the collapse of demand in one sector have had impact on sectors related to it. Moreover, the collapse of income and employment has obviously affected overall demand in the economy. For example, although agricultural production is reckoned to have escaped the worst effects of the lockdown, allied activities like dairying and poultry have been hit hard.

“Lost” output and growth projections

Assuming four different “scenarios” the study provides a range of estimates. Since the lockdown was not uniform across sectors, each of the four scenarios involves assumptions on the sector-wise number of days lost due to the lockdown.

The most charitable assumptions result in an estimated “loss” of almost 12 per cent of national output in 2020-21. Shockingly, however, under the most stringent scenario — perhaps also the most appropriate one — more than one-fourth of output (26 per cent) is expected to be lost in 2020-21.

The authors estimate GDP to decline by between 6 per cent and 21 per cent during 2020-21. However, they postulate that GDP is likely to decline between 15 and 21 per cent during the current year, corresponding to the two worst-case scenarios constructed by them.

All-round collapse

The authors also provided a disaggregated sector-wise estimates of Gross Value Added (GVA) to this author. They reveal a picture of all-round collapse. Thus, GVA in even sectors like electricity, water and gas, which escaped the most restrictive effects of the severe lockdown, are likely to decline by between 12 and 15 per cent in the two worst-case scenarios.

Hotels and restaurants, knocked out in the lockdown, and even now only limping back into business, are among the worst-hit sectors. The study estimates that GVA in this line of activity is likely to fall by a whopping 33 to 51 per cent. Gross Value Added in the Trade and Repair sector is likely to fare only slightly better, declining by between 33 and 51 per cent. Even GVA in Agriculture, Hunting, Forestry and Fishing is estimated to decline by between 11 and 16 per cent in 2020-21.

The GVA in construction, a major activity that accounts for a major chunk of employment in rural as well as urban areas, is expected to decline by between 18 and 26 per cent. The GVA in manufacturing, which came to a virtual standstill during the lockdown, is projected to decline between 22 and 28 per cent. Mining and Quarrying is likely to decline by between one-fourth and one-third in 2020-21. Other services like financial intermediation and real estate are also projected to undergo a sharp decline; while GVA in the former is expected to contract by 27-34 per cent, the latter is expected to shrink by 19-22 per cent.

The paper reckons there could be two possible factors that could redeem this otherwise depressing picture of the economy. The first is a possible recovery in the third (October-December 2020) and fourth quarters (January-March 2021). The second is the possibility of a more broad-based revival package, which is led by a significant fiscal stimulus, unlike the earlier one termed Atmanirbhar that was unveiled with much fanfare. The authors note that the “stimulus” package amounted to a mere 1.5 per cent of GDP, insignificant when compared to special packages announced by governments across the world.

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Interestingly, the initial growth projection made by nearly every institution has been revised as the pandemic has progressed. For instance, the International Monetary Fund, in its initial estimate of April 2020 projected a positive growth at 1.9 per cent. However, by June it had revised this to -4.5 per cent. Almost every other agency has had to revise its growth projection.

The expectation that the easing of the lockdown would result in the restoration of normalcy has been belied by two important factors. For one, since the easing the pandemic has assumed even more dangerous proportions. This has had a direct bearing on the conduct of economic actors. The spread of the disease and the fear it has generated are hardly conducive for a confident economic revival.

The second factor is that the widespread loss of employment and slashing of wages and salaries across the length and breadth of the Indian economy — even among those who have managed to retain their jobs — is bound to worsen the slump in demand.

As the Indian economy lurches towards its worst-ever recession, it may well be time for North Block to appreciate that a delayed stimulus — a substantial one, not a symbolic one — would be too late, like giving medicines to a dead patient.