Here's what the quarterly GDP growth catastrophe suggests

The news of one of the largest emerging economy’s growth contraction by nearly 24% in the first quarter of 2020-21 should perhaps be the main talking point of discussion, deliberation and for policy-response consideration, across all platforms of media.

Unfortunately, that doesn’t seem to be the case. India’s economy is in deep trouble. And, if there was any doubt one had on how bad the situation really looks - now and in the months ahead - just look at the numbers on Q1-growth. It is worth noting that quarterly growth figures are often subjected to substantive revisions over time (as more data sets come in from sectoral and state-levels and are factored to previous estimates). However, what is certain is how even an overall GDP contraction by 24% is an under-estimate at best.

Why is that the case? For one, this number alone doesn’t reflect (or underpin) the impact seen from a total decimation of India’s unorganised, informal economy which constitutes the bulk of our economic activity and absorbs the maximum workforce.

Second, because we don’t have the gross state domestic product (GSDP) numbers produced quarterly for most states, one still doesn’t know the differential nature of severity in impact caused from the curfew-style lockdown across states (which bore the brunt of the economic cost). Third, if we simply take the government expenditure numbers aside from the released quarterly data (constituting around 16.4% of total expenditure), the contraction in GDP seems to come around 29.3%.

This non-government GDP trend (at 29.3%) is important given how the main source of growth - even before the pandemic started - was based on a higher government expenditure, as private investment and consumption expenditure was already contracting from a deep demand-side slowdown. Now, given how poor the fiscal state of affairs already is, it seems highly unlikely that the Union government will do much to boost spending to stimulate growth.

What’s also strange is how, despite an increase in government expenditure for Q1, when one looks at the sectoral data for public administration and defence (where government spending is allocated at the highest weight), there was a negative growth of 10.3% registered for Q1, 2020-21. So, we don’t really know where and for what did the government spend on in this quarter.

In any case, the worst-case scenario might still not be over. The current quarterly data is for those months when the shutdown was most fierce and enforced in a curfew-style manner across country, but even now, as India keeps unlocking, the virus is spreading rapidly in parts of semi-urban and rural hinterland, presenting a grimmer economic (and public-health) future.

Not only did an intense (pre-mature) lockdown destroy the base of our economy for months, what’s worse is how little was done during that time to actually address the public health response to contain the virus. Locking down, was unfortunately, seen as some magical cure to contain the virus.

Still, on the economic spectrum, one shouldn’t get too stuck on the current growth numbers alone, or by the sectoral growth projections. Compared globally, even in the UK, months of lockdown (though not so intense as the one in India) contracted their economy by over 20%. However, their government was swift to realise the gravity of the problem then and undertook a massive economic relief programme (through greater stimulus) to kickstart growth.

More than the actual fiscal capacity to spend, the directionality of measures taken to boost consumption expenditure, incomes and private investment, matters now more than ever.

It is worth realising that India has been facing a crisis of low productivity which might make any temporal stimulus response ineffective. There is a need to understand the endemic concerns: the composition of demand (skewed towards the top 5% consuming class); a credit-freeze in the financial system (choked by rising NPAs); low wages in non-farm segments (worsened by problems of contractualisation); high gender inequality in the workforce (where more than half of the population that is female has a lower workforce participation rate than men), and a poor export demand volume for Indian goods and services. Adding to a broken, deeply fragmented labour market where labour productivity (and wages) is at its lowest threshold.

‘Act of God’

To get out from such a vicious cycle of low productivity-growth, there is no ‘Act of God’ required but a conscious need to acknowledge the seriousness of our economic woes and have a medium-to-long term strategic plan allowing for greater government spending (as part of a counter-cyclical response) that is targeted to crowd-in private investment and a higher consumption expenditure amongst households and firms in sectors of manufacturing, construction, real estate, travel, tourism and services (those worst hit by the pandemic).

This also means that the Union government needs to take fiduciary responsibility, providing for greater revenue allocation and capital to states whose fiscal capacity has been adversely impact from the tanking of GST revenues. The federal core of the Centre-state fiscal relationship is perhaps at its worst now.

Further, to work towards increasing labour productivity, a more worker-centric policy push aimed at reducing contractualisation of workers, creating a higher-wage paying ecosystem may incentivise workers (especially those who reverse migrated) to move back into productive-sectors (manufacturing, construction, services etc).

A few policy measures, like offering more socially-protected worker contracts (say, safeguarding health and unemployment insurances as benefits); implementing premium wage-rates (double for contractual hires as against others); extending the probation period to more than a year; and, ensuring greater legal representation and awareness to concerns of workers, and incentivising the presence of unions for minority workers (across the social categories of gender, class, race etc), are all critical steps that can help provide a more progressive social and economic future for workers.

Private-sector union density must also increase in medium to large-scale organisations to make the design of worker-contracts more protective of and fair to safeguard worker-interests while enhancing the credibility of the employee-employer partnership.

(The writer is Director, Centre for New Economics Studies, Jindal School of International Affairs)