The comic Norm MacDonald has a classic routine about party conversations, and how he doesn’t have anything knowledgeable to talk about. So, when someone starts talking about the state of the economy, Norm says “that deficit, that sure is bad.” That’s all that he knows about the economy – the deficit is bad.
Most of us are like Norm, when it comes to the GDP – if it’s growing at eight percent, it must be good, five percent is not good, and -7.5 percent is surely pretty bad.
The ‘bad’ is where we are at in the latest official figures, for the second quarter of this fiscal. To the inebriated, quarters mean something else, but in the world of finance it is a three-month long period. In this case, we are talking about GDP clocked between July and September this year.
How Did the Lockdown Affect Economy?
We know, in those three months, we were still in partial lockdown. Factories were either shut or operating well below capacity. Most services went online and employees were asked to WFH. Restaurants and hotels were down to less than a quarter of their normal business. No one was travelling. Even the government was in shutdown mode.
Obviously, if most people do not go to work, the chances of the economy growing is very slim. In the first quarter – April to June – there was an almost total lockdown. So, the economy contracted by nearly 24 percent.
In the latest quarter, things had only opened partially. Therefore, our GDP contracted by 7.5 percent. This is actually better than what most economists and number-crunchers had expected. And this has led to an atmosphere of ‘cautious optimism.’
There are two key reasons for this. The first is the amazing bounce-back in factories. In the last quarter of 2019-20, when there was only a week of lockdown in late-March, India’s manufacturing sector had contracted by more than a percent compared to the previous year. In the latest quarter, despite a much more intense lockdown, manufacturing expanded marginally.
Some find this strange, because it doesn’t sit well with the manufacturing data that the government releases as part of the monthly Index of Industrial Production.
According to the IIP figures, factories produced nearly seven percent less in the July-September quarter this year. Yet, in terms of gross value-added (GVA) in the national income data, manufacturing expanded by about half a percent.
This is because GVA is calculated using a combination of profits made by listed manufacturing companies and the output estimates given in the IIP data.
‘The Rich Did Better, the Poor Fared Worse’
According to CMIE’s calculations, listed manufacturing companies had an almost 14 percent growth in their operating profits, which works out to nearly seven percent growth in real gross value added. So, even though in real output terms factories produced less, the rise in profits showed up as higher real income for the sector.
This is extremely significant, especially when we combine it with CMIE’s survey data on household income. That shows throughout the September quarter more than half of the households surveyed said their income had fallen compared to last year. Less than 5 percent said they were earning more.
As CMIE’s Mahesh Vyas writes, while profits in the listed manufacturing space in this period increased by almost 18 percent, wages dropped by about a percent.
What does this tell us? The richest people in India have done better in the September quarter, while the middle class and lower-income groups have fared worse.
We need to keep this in mind when we look at the decent recovery in household consumption expenditure. This is the single biggest entity, when the GDP is calculated from the ‘expenditure’ side, and it generally accounts for well over half of the total expenditure in the economy.
While household consumption had dropped by a massive 27 percent in the first quarter, the decline has narrowed to just over 11 percent in the second quarter of 2020-21.
Why Is the Rich-Poor Gap Worrying?
The skewed distribution of income – the rich getting richer, the rest getting poorer – suggests that much of this consumption recovery is driven by the top five percent of Indians who own any significant amounts of capital.
For the rest, consumption might have been sustained through personal loans or eating into savings.
This is bad news, since consumption by the rich is usually replacement demand, which gets saturated very quickly.
The pent-up replacement demand – for cars, refrigerators, TV sets, washing machines – and the new demand from the affluent for labour-saving devices in the absence of household help – dishwashers for instance – pushed up the sales of consumer durables in September. This has continued in October as well.
If the demand doesn’t expand beyond this small affluent class, then manufacturing growth will taper off as fast as it expanded.
Collapse of Government Consumption Expenditure Is Equally Worrying
There is one more worrying sign in the GDP data, and that is the collapse of both government consumption expenditure and value added in the government sector.
Government’s final consumption expenditure, which had grown by a handsome 16 percent, even during the first three months of the lockdown, dropped by a whopping 22 percent in the September quarter. In 2011-12 prices, it was just Rs 3.62 lakh crore, which is the lowest it has been in the last six quarters.
This is much more of a collapse than what economists had expected. They had based their calculations on the 14 percent drop in revenue expenditure by the Centre in this quarter.
The huge drop in government consumption suggests, spending by state governments has contracted even more than what was expected.
This is corroborated by gross value-added in the government sector. Public administration, defence and other services was the second worst performing sector. Its GVA declined by 12 percent compared to the same period last year. Only the category of trade, hotels, transport & communication showed a larger decline.
Despite the talk of stimulating the economy by spending on infrastructure, the Centre’s capital expenditure in the September quarter was cut by nearly 38 percent in today’s prices.
CMIE’s data on capital expenditure across the economy, shows it dropped to a 16-year low in the second quarter.
This suggests that the sharp rebound in Gross Fixed Capital Formation, is driven by companies beginning to complete projects which had been stalled because of the lockdown, and not by any fresh investments.
So, the ‘recovery’, that we have seen in our GDP in the second quarter of this fiscal, is based on three key things – pent up demand for manufactured goods, higher consumption by the richest households which have gained from increased profits, and revival of ongoing projects that had stopped because of the lockdown in the first quarter.
This is a very shallow recovery sitting on a narrow and temporary base. The fact that the majority of households are facing a drop in their income means their consumption demand will drop further.
If the government continues on this path of fiscal-fundamentalism, that it has demonstrated in the form of lower expenditure and reduced investments in this quarter, then we are in danger of a much longer drawn-out recession, than the latest numbers suggest.
(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)