Read Economic Survey’s V-shaped recovery projection with circumspection

Expectations from this year’s customary annual state of the economy report, which precedes the Union Budget, were unusually heightened. It was expected to be the first detailed report on the extent to which the economy was ravaged by a once-in-a-lifetime global pandemic, apart from providing a cogent and measured forecast of what to expect in the forthcoming financial year.

The Survey for 2020-21 is, unsurprisingly, dedicated to India’s COVID warriors. The key takeaway was its estimate that India’s GDP would contract by 7.7 per cent in the current financial year. This is broadly in line with the projections made earlier by the Reserve Bank of India, the International Monetary Fund as well as by investment bankers and  private sector agencies.

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However, the Survey’s happy tidings are in its estimate that the economy would bounce back in 2021-22, with the GDP growing by 11.1 per cent, before moderating to a little less than 7 per each in the two subsequent years.

Pet themes  

The latest Survey bears the unmistakable imprint of the government’s Chief Economic Adviser, Krishnamurthy Venkata Subramanian. The Survey, like the one last year, is in three volumes. The first volume reflects an assortment of interests and themes of interest to its chief author. Among these are philosophical explorations of the growth versus inequality debate, the pandemic and a wishful hope that healthcare is assigned the high priority it deserves without a concomitant attention to how it is to be achieved.

And, in keeping with his penchant for gimmickry, which in the last edition of the survey included a reference to “thalinomics,” this year, Subramanian has taken a leaf out of Kipling’s ‘Jungle Book’ to design an index of Bare Necessities.

In keeping with his soft spot for contrivance, Subramanian has suggested a regulator for the health care sector. But the catch would be that this would function like a rating agency. He seems unfazed by the dubious experience with rating agencies, which have been instrumental in every major economic meltdown in the past. The last volume is, as always, a statistical appendix, which provides a wealth of information on the economy.

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Ironically, the Survey paints a virtue of the supposed trade-off between lives that were saved during the pandemic and the economic consequences of COVID-19. How easily the political masters and civil servants forgot about the many lives lost by desperately footloose people trying to reach their homes in the midst of a draconian lockdown.

However, the real meat of the Survey — in fact, its very raison d’être — is in Volume 2, which provides some idea of the performance of the economy. However, even this volume starts with a long-winded digression into how the Narendra Modi government handled the pandemic. Rather smartly it claims that the government understood the key importance of “timely identification” and, therefore, laid emphasis on testing to limit the spread of the disease. This is largely untrue as for a long time since March 2020, when the country went into a harsh lockdown, testing rates in India were among the lowest in the world; they are even today.

The volume then goes on to diagrammatically explain what was well understood by most economists — that the pandemic’s economic impact was unique because both demand and supply were simultaneously hit, unlike in a normal recession.

Unwarranted optimism

Three important observations are in order about these optimistic numbers projected in the Survey. The first is purely arithmetic. Even if — and that is still a big if — the economy grows by 11 per cent in the next financial year, after declining by 7.7 per cent in the current year, it would still mean that the economy at the end of the next financial year would have grown by an average of a little over an annual rate of two per cent over a two-year period (from 2019-20 to 2021-22). In effect, over a three year period the economy would have been virtually running to stay in the same place. Mind you, even this is only guaranteed if the projections were to actually materialise.

For now, however, Subramanian seems to have gotten away with the statistical illusion created by the numbers, by what is referred to as the base-effect problem by statisticians. What this means is that since the economy collapsed so badly in the current year, any growth at all in the next year will be statistically amplified, giving rise to the illusion.

The second point to observe is that the basis for the optimism — that economy is well and truly on to a V-shaped recovery is entirely based on forecasts and expectations. All the eloquent rejoicing about how resilient Indian agriculture has been ought not to take away the fact that the GDP emanating from the agricultural and allied activities is less than one-fifth of the overall economy — in fact, just 18 per cent. Moreover, although the initial value of output estimated by the statistical agencies may have grown, the relatively smaller fraction of arrivals of agricultural produce at the mandis this year indicates that actual farm-gate prices, and, therefore, farm incomes, would have fallen.

The loud and oft-repeated claims that the Indian farmer has largely escaped the full-blown effects of the COVID-19 pandemic thus needs to be regarded with a degree of scepticism.

V-shaped recovery by no means a certainty

The third point about the Survey projecting a V-shaped recovery is contingent on a number of factors, including the nature and scope of government expenditures in the next year. In fact, the suggestive display of a V-shaped recovery on the cover indicates how invested the CEA is on such an optimistic projection.

What is the basis for this assertion? A series of charts presented in Volume 2 indicate — as one would expect — a sharp slump followed by a recovery. The Survey asserts that the sharp recovery of  “indicators” like e-way bills, GST collections, electricity consumption, movement of freight and other such variables signify not only a sharp recovery but a V-shaped recovery. This is an obvious exaggeration for several reasons, but just highlighting two would be enough to make the point that the official prognosis for the economy needs to be treated with circumspection.

First, as the GST data has shown in the last two or three months, there is still no evidence that the economy is on a secular upswing. It could well be that what is being portrayed as a sign of recovery may, in fact, be just the output that is meeting pent up demand following the lockdown. Clearly, that trend may or may not be sustainable over a longer time frame; we simply need more data before we can assign an alphabet to the nature of the Indian recovery.

The second point that needs to be highlighted is that the economy for quite some time may not be one in which all boats rise at the same time. In reality, the recovery is quite likely to be in fits and starts with some segments recovering faster than others and still others stuck in the rut for much longer.

In fact, a striking chart on page 23 (Volume 2) of the Survey depicts a V-shaped recovery of industrial output. The only problem with the V is that it is almost entirely under the zero line in the chart! A very similar chart depicts the performance of the core sector (coal, gas, fertiliser, steel, electricity, etc). Clearly, more data is needed to conclusively establish that the Indian economy has turned its darkest corner.

The Economic Survey, traditionally regarded as an official evidence-based document that spells out a well-argued economic strategy, has failed to provide evidence. It is a pity that smart gimmickry has replaced substance.