The GDP data of
the first quarter 2020-21 is out. India has experienced YOY decline of 23.4% in
the Q1. It is hardly surprising. The period of the first quarter of the
pandemic year 2020-21. It was a period where there was a lockdown through the
country for most part of the period. In fact, the lockdown began to be eased
only in the middle of May which of course triggered the migration back home of
the thousands of migrant workers from Maharashtra, Gujarat etc. Therefore, even
though the economy began taking baby steps once again, the paucity of labour
added to the shortage. Hence there was a widespread expectation of rapid
collapse in the economic growth rate. Therefore, prima facie, the quarter was
an outlier. In fact, the quarter has seen decline in economic growth across the
world. The US recorded a YOY decline of 30%+ while Singapore recorded a decline
in excess of 40%.
There is no
surprise anywhere about the direction of the global economy. As the world reels
from the pandemic, it is obvious that the economic repercussions would be high.
Secondly, given the context of the reporting quarter, very little can be
interpreted out of this to plan for the future directions. An outlier has to be
treated the way it should be. There are hardly any projections that can be
garnered through this quarter for the year ahead. This holds good not just for
India but for other countries as well.
Yet, to the
media, electronic, print and internet, this obviously gives some talking
points. There would be no dearth of advice on what needs to be done to revive
the economy. Experts are mouthing platitudes on locating the roots to the
supply side or the demand side. The answer in the first quarter was obviously
both. The lockdown meant the demand was curbed. This implied Aggregate Demand
(AD) was artificially supressed. Equally by stopping production, the Aggregate
Supply (AS) too was curbed artificially. Therefore the AD-AS equilibrium
automatically shifted downwards indicating a decline in the economy. The focus
of the government was to ensure the transition has to happen smoothly without
any bankruptcies. The dangers here lie in personal insolvencies which have to
be avoided. The government did try to prevent it by allowing moratorium on
loans but these too are reaching their point wherein the diminishing returns
would set in.
At this stage,
it would however be imperative to decode what lies ahead for the economy. It
must be noted that post June, most sectors are opening up. However, the
passenger transport sector especially the railways are opened up only
partially. There are few sectors like movie theatres, entertainment parks, pubs
etc. which remain closed. Yet for practical purposes, a number of sectors have
opened up. If there is an issue, it lies in the availability of labour. Most
migrant labourers are yet to return to work. Incidentally, as the railways
point out, their construction plans are experiencing over runs because of
shortage of labour. There is of course a need to offer higher wages to attract
labour which might create conditions for cost push inflation something
discussed in the earlier posts. Therefore, the supply side problems, rather
than being artificially curbed is primarily due to the non-availability of
labour. The government of course has expanded the MNREGA days offering them
employment at their home villages or towns thus giving them some employment. This
too would be a deterrent in them coming back to their places of work. As the agricultural
season ends and so does the festival season, many labourers would return back
to the cities in all probability.
The other side
is the demand driven issue. The marginal propensity to protect is usually high
in these days and therefore, the demand side sees a fall. The consumption is
now driven by autonomous factors than by induced factors. The governments might
offer certain inducements yet in the absence of the secure feeling, the people
are unlikely to venture out into purchasing things. They tend to avoid
consumption that can be postponed to some future date. It is the cost benefit
analysis driven by subjective probabilities that determine the decision making
during these uncertain times. These subjective probabilities change with rapid
frequency. Furthermore, with each one thinking similar lines, the aggregate
turns into a magnifying impact in terms of decline in demand.
There is no
demand side or supply side solutions in conventional terms. The economics of
market side mandate the supply would create its own demand. Yet, as instances
like 1929 have demonstrated when autonomous factors override induced factors,
these supply side solutions will not work. Similarly, the limits of the
monetary policy are being touched. The monetary policy or at least as one knows
it is perhaps dead or in the terminal stages. Therefore, the solution seems to
lie in the government spending. The discretionary fiscal spending increases which
would put a pressure on the fiscal deficit. This is the stage where the
government must use the fiscal leverage to upend the infrastructure projects. The
capital expenditure would earn returns in the future period and therefore deficit
financing would make sense. Yet, if the expenditure is more on revenue items,
something that cannot be ruled out big in these times, there could be impact in
the future years. Yet, the governments across the world have little option but
to loosen their purse strings. This could also be an opportunity to introduce some
sort of universal basic income at least to some vulnerable sections of the society.
As the economy
opens up, there will be growth ticking back. However, there would be
uncertainties given the possibility of infection on the company site etc.
Secondly, given the uncertainties in demand side might also lead to chain of
events leading to supply uncertainties. Yet, barring a few segments, there
would be a slow improvement in things. The overall projection for growth rate
for the FY2020-21 is likely to remain negative. The growth in the positive
territory would start emerging only perhaps in the first quarter of FY2021-22.
While the news is certainly gloomy, there is no need to lose a lot of sleep for
the results of the first quarter. What would however be important are the
indicators than point to possible recovery or otherwise (lead or co-incident
indicators). These would be of importance to make judgments on the directions
the economy is likely to head to.
Comments
Post a Comment