The service sector collapse recovery: A distant dream

Udayan Hazarika

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

Government of India's statistics Office (National Statistical Office) has formally announced that India is in recession- and thus the recession in India is now official. Compared to the downturn in GDP in the April-June quarter of this fiscal to the extent of 23.9 per cent, the rate of contraction in the July- September quarter was low. As per estimates, gross domestic product at constant prices (2011-12) was Rs 33.14 lakh crore as against Rs 35.84 lakh crore in July-September of 2019-20 giving a contraction of 07.5 per cent compared to the same period of last year. The first quarter decline (23.9%) is understandable as the nation was under full lockdown for almost two months. Then there were the announcements of phase wise relaxation in some areas, full relaxation in certain areas and no relaxation at all in some other areas - creating a situation full confusion and uncertainties everywhere. The last month of the first quarter also remained uncertain and business was sporadic due to the fact that in many urban centres lockdown was continuing partially. July was the first month when business started picking up with huge amount of government fund pumped in the economy to restore the gradually falling demand and it indeed worked effectively with private consumption expenditure improved substantially reducing the contraction rate to 11.32 per cent as against the same period of last year compared to the rate of 26.68 per cent in the first quarter.

However, its contribution to the GDP has shown a marginal decline in the Q2. But the case of government spending is surprising. There was growth in the first quarter expenditure to the tune of 16.4 per cent which fell significantly in Q2 registering contraction to the tune of 22.18 per cent as against the same period of previous year. This is quite a significant fall as government spending has strong bearing in the movement of the service sector and also in the demand pattern. Thus, the total contribution of the sector to the GDP declined significantly from 18.1 per cent in the first quarter to 10.9 per cent in the second quarter. This is how government spending has pulled down the GDP growth rate in the July-Sept quarter while other indicators were more or less in expansion phase. During this quarter, net investment fell by 7.3 per cent compared to the same period of the last year. There was a positive gain in case of net exports but it was only marginal. Thus, despite the overall fall of 7.5 per cent in the GDP, except Government spending, all other parameters were performing well in actual terms compared to the first quarter of the current fiscal.

Now let us have a look at the sector wise health in terms of gross value added (GVA). Gross value added indicates the contribution of each sector of the economy which when added together with the taxes and reducing the subsidies gives the GDP at market prices. As usual, agriculture has continually been maintaining the growing trend uninterrupted since 2017-18 despite lockdown. There has been an increase in gross value added (GVA) in agriculture to the tune of 3.4 per cent maintaining the level as that of the first quarter. Latest data on agriculture show that Rabi sowing has been extended to around 34.82 million hectares comprising of 4.02 per cent more than the last year. Late withdrawal of monsoon has helped increase in area coverage. Manufacturing sector too has performed well in the July-September quarter and in fact has crossed the pre-COVID mark and somehow escaped from the pace of contraction by 0.6 per cent.

Contraction in the service sector is the main concern of the economy as it has not been recovering as yet and that the market forces do not always work in case of humans. Despite the fact that the sector contributes highest to the GDP, the remedial measures taken by the government yet to yield the expected results. In the construction sector Q1 contraction was to the tune of 50.3 per cent compared to the same period of last year which although recovered to a great extent yet failed to reach the pre-COVID level. The second quarter contraction was to the tune of 8.6 per cent compared to the same period of last year. There are three points that needed to be noted in regard to the slow pace of picking up of construction activities i.e. i) rising cost of building materials in the post lockdown period resulting in abandonment or slowdown of the ongoing constructions , ii) substantial second quarter slowdown of government spending on infrastructure activities, and iii) non reporting of the migrant labourers to the work leading to shortage of labour. It is worth mentioning here that Construction sector is highest employment generating sector in the country next to agriculture. The sector employs over 51 million workers constituting about 12 per cent of country's total labour force. But as per an estimate, more than one third of the labour force in the sector has not yet joined their works.

Next in the service sector comes the services in trade, tourism, hotel, transport communication etc., where the sector contracted to the extent of 15.6 per cent during the July-September quarter. The contraction was to the tune of 47 per cent during the April-June quarter. As per credit rating agency ICRA, the hospitality sector will inevitably see an "increase in credit distress in the coming months." Many hotels had to close down their business while many are running at a huge loss with 10 to 15 per cent occupancy expecting good days ahead which however, is not forthcoming. India's tourism sector contributes 9-10 per cent to the GDP which is a big amount. As many as 87.5 million people are engaged in hotel, tourism and transport sector. But due to lockdown an estimated 40 million will lose their jobs with a revenue loss of around $17 billion.

Financial, real estate and professional service sector has contracted 8.1 per cent as against the same period of last year. In April-June quarter the rate of contraction was 5.1 per cent. There was a boom in the demand for accommodation in the high class cities and on the outskirts during the initial lockdown period for running the business from home or for work from home mode. But that has little impact in the overall demand position and impact of this demand was neutralised when rented accommodations were vacated in large number in the class II and Class III cities by job losers, migrant workers and for closing down of many offices. Business houses running guest houses in such urban centres were vacated to cut-down the cost.

The service sector collapse has an all-round impact on the economy- right from growing unemployment to poverty and demand driven deficiency of the economy to rising inflation. This impact could have been averted had there been a planned lockdown. Now despite the continuing process of normalization recovery is far from being in sight.