The economic shock

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

In a recent statement (July 11) Governor of the RBI has expressed his satisfaction about the response that the economy has shown towards the steps taken by the Government for returning to normalcy. But his contentment appears to be limited when at the same time he also indicated (about the uncertain behaviour of COVID-19 and the length of its impact on the economy. Being the head of the country's apex bank, he rightfully expressed his agenda of economic growth as his "top most priority" but had not said anything about the prevailing trends of various economic sub-sectors. The statement came at a time when various economic agencies have assessed India's economic downturn at various levels – the sharpest being the IMF's 4.5 per cent negative growth rate for the current year. Interestingly, the IMF had in January 2020 itself assessed the growth rate at 4.5 per cent as against Government assessment of 5.0 per cent for the year 2019-20. Under this backdrop and the distinctly available trend of COVID-19, it is puzzling as to how the Governor could be so positive about the economic turnaround.

It is now no longer a secret that the economic downturn had started way back in the July quarter of the 2019. Interestingly, while the economic variables were not showing their pace of progress as expected, the Government was complacent with the assessment that there shall be an overall growth of 5.0 per cent during the year. There was neither any emergency call to safeguard the status quo nor any backup plan to support the ruling growth rate; and the result was that- it collapsed.

The root cause of this baseless expectation was actually the sign of recovery shown by capital market with picking up of the BSE Sensex index by 7.0 per cent during November- December 2019. This recovery had raised the confidence on the capital market attracting more and more foreign direct investment. However, vary soon the expectation proved wrong and the overall growth rate for the economy had to be lowered down to 3.2 per cent for 2019-20. It was just the similar situation that the RBI Governor has seen normalcy in the economy. Fixing a higher growth target for the economy despite having the adverse economic trends and then lowering the target realising the reality - both indicate mismanagement of the economy by the guards.

If we look at the overall performance of various sectors of the economy, for the year gone by, we will see that except the agricultural sector, none other sectors performed to their expectations. It was sheer by chance that the agriculture and allied sector had registered a growth of 4.0 per cent over the 2.4 per cent of previous year. Apart from this, all other sector has failed miserably. For the manufacturing sector, it was a completely awful year and it could not catch up with the previous year's trend rather started trailing behind from the July quarter of 2019-20 – and it continued for the whole year. There was deceleration of the industrial production to the tune of 1.4 per cent during third quarter compared to the same period of previous year (2011-12 base prices). In fact, the three key sectors of industries (namely manufacturing, mining and electricity) have all performed badly. As per the final figures, manufacturing production contracted at record low of (-) 22.5 per cent, electricity sector at (-) 8.2 per cent and mining at (-) 1.4 per cent. Similarly, the service sector which is the greatest contributor to the Gross Domestic product, (56 per cent in 2018-19) could not succeed in maintaining this trend. The three important components of the Service Sector namely i) the construction sector registered a growth only to the tune of 1.3 per cent as against 6.1 per cent of the previous year ii) the trading sector registered a growth of 3.6 per cent as against 7.7 per cent last year and iii) the business in real estate sector with a growth of only 4.6 per cent as against 6.8 per cent last year. Thus, on the whole the year 2019-20 presented a pathetic scenario for the economy and we are supposed build up positive trend on this hopeless base.

Under the backdrop of above performance of the economic sub-sectors in 2019-20, the RBI Governor's complacency about the economic turnaround appears to be unfounded. The available trends covering April-June 2020 quarter also don't support this turning around thesis. Let us have a brief look at the sectors.

Recently, the National Council of Applied Economic Research (NCAER) has come out with their assessment that all sectors including agriculture would not be able to make up their share to the economy in the current year and the most unfortunate will be the fact that the impact of COVID-19 lockdown will paralyse the economy till the next year as well. However, contrary to this view of NCAER, NITI Ayog is hopeful that agriculture production will pick up shortly and finally the farm sector will show up growth at least 3.0 per cent in the 2020-21 as against the last year's 4.0 per cent and the sector will again emerge as the key contributor to the GDP. The basics behind this contention are the forecast of normal monsoon by the weather department. Another important point picked up in this connection was the announcement of the Fertiliser department that purchase of fertiliser has substantially picked up during April-June period and it exceeded the last years mark by 82.81 per cent (i.e. from 61.05 lakh MT last year same period to 111.61 Lakh MT). Knowing very well that COVID-19 has not yet reached its peak in India, Niti's assessment in respect of agriculture sector may not work out well finally.

In respect of the industrial production, as per the quick estimate released by the government for the month of April, the figure has shown an unprecedented fall to the tune of 57.6 per cent. Against this, however the figure for May/2020 showed a slight improvement in the industrial production leading to a decline in the rate of dropping to 34.7 per cent. Evidently this deceleration as a whole was the cumulative impact of the COVID-19 lockdown. But reports available from some private surveys show that manufacturing output has showed a stabilizing tendency with placing of more and more fresh demands encouraging expansion of output and employment in June 2020. However, due to recent sharp rise in virus attacks in many forward States and consequent imposition of fresh lockdowns, the trend of demand is weakening in the later parts of June. Thus, it is very early to conclude that industrial output has stabilized.

In case of the worst affected service sector, there appears to be no sign of any enthusiasm for resuming the activities. It remained sluggish due to complete mismanagement of the unorganized and casual labourers. The migrant labourers started returning home only after the lockdown-2 leaving their jobs behind and thereby creating a large-scale shortage of labourers in construction and other service sectors. Most of these labourers do not have any service guarantee even if they return to their old jobs. With this uncertainty, many of them are awaiting a call from their employers or sarders while many have started their back journey keeping in mind their uncertain future at home State. There has already been an acute rise in the rate of unemployment. Many business houses are continuing to shed more and more jobs adding fuel to the fire. All these have led to an unprecedented rise in the unemployment rate in April to the tune of 23.5 per cent as against 9.21 per cent in 2018. However, the good news is that the rate has fallen to the level of 11 per cent as in June 2020.

From what has been discussed above, it is now clear that the economy is in the grip of serious uncertainty. Now this situation cannot be termed as recessionary as it did not originate as a result of failure of economic variables rather it was the result of forced blockade of economic activities. The economy is actually in a shock. A situation of this type would need substantial time to recover and it is too early to think the way the RBI Governor did. The stimulus package that the Government awarded to the most adversely affected peoples does not seem to have any impact on the economy in the short run. It is in the interest of the economy that the government make some further provision for quick creation of demands giving some monetary benefits to the rural masses thereby giving them more purchasing power. This would set the recovery trend in the take off stage.