Think GDP Numbers Are Bad? It’s Much Worse. Can Modi Save Economy?

India’s GDP Data: Here is why Modi govt’s loan ‘melas’ cannot fill up a huge hole.

Imagine you are a mid-level corporate executive. The first quarter of each fiscal year – April to June – has a special meaning in your life. That’s when your company usually announces raises. A decade ago, when you started working, you used to get double-digit increments. Over the past few years, that’s dropped to a tepid 5-6 percent. This year, COVID-19 forced your company to lockdown its offices. You had to work from home. And, instead of a raise, your boss sent you a mail, saying your salary was being reduced.

The good news is, that you are not alone. India’s entire economy has taken a similar pay-cut.

The size of our economy – what we know as GDP – is down by nearly a quarter of what it was in the first quarter of the last fiscal.

And, had it not been for increased government expenditure and a sharp drop in imports, the GDP figure would have looked even worse.

How Collapse In Consumption & Investment Made GDP Numbers Look Better Than They Are

Normally, most of our national income is made up of private consumption and investment. In Q1 last year, these two items accounted for about Rs 43 lakh crore in 2019 prices. This year, that number has dropped by a whopping Rs 14 lakh crore in today’s prices. That is nearly half of the central budget for all of 2020-21. Increased government expenditure could do very little to make up for this decline. Government consumption increased by Rs 1.2 lakh crore in current prices, which is not even one-tenth of the total drop in private consumption and investment.

Ironically, the collapse in consumption and investment ended up making the GDP numbers look better than they really are.

As the economy shut down, households and companies bought less from the rest of the world. So, imports dropped sharply – by 40 percent in real terms, and more than 38 percent in today’s prices. Exports were affected too, but by a smaller degree. Normally, India imports much more than it exports, and this gap is usually about 3-4 percent of GDP, depending on whether you have adjusted for inflation or not.

In Q1 this year, we ended up exporting more than we imported, boosting the GDP numbers, despite the fact that low imports are a symptom of a contracting economy.

• India’s entire economy has taken a similar pay-cut. The size of our economy – what we know as GDP – is down by nearly a quarter of what it was in the first quarter of the last fiscal.
• Ironically, the collapse in consumption and investment ended up making the GDP numbers look better than they really are.
• In Q1 this year, we ended up exporting more than we imported, boosting the GDP numbers, despite the fact that low imports are a symptom of a contracting economy.
  
• There’s also been an unexpected 10 percent drop in value added in the government sector. This is probably because many government offices were shut while subsidies shot up.
  
• The only sector which has grown is agriculture. This was expected, given that the lockdown was relaxed to allow farmers to complete the Rabi harvest.
  
• But, even here, the fine-print suggests that the average farmer didn’t gain at all.

Agriculture Has Grown But The Farmer Hasn’t Gained At All

Of course, the lockdown was bound to affect most parts of the economy. As expected, the worst affected sectors were construction, hotels, trade and transport, where valued added dropped to nearly half of what it was in Q1 2019. Manufacturing declined by nearly 40 percent, while mining and quarrying dropped by almost a quarter. Official GDP data clubs together real estate, financial services and other professional services. This category declined by just a little over 5 percent. Chances are the aggregate number hides a much larger drop in realty and other professional services, while value added in banking and brokerages would most likely have gone up.

There’s also been an unexpected 10 percent drop in value added in the government sector.

This is probably because many government offices were shut while subsidies shot up.

The only sector which has grown is agriculture. This was expected, given that the lockdown was relaxed to allow farmers to complete the Rabi harvest. But, even here, the fine-print suggests that the average farmer didn’t gain at all.

To understand this, let us take the case of a farmer who spends everything that he earns (even though in the real world most Indian farmers spend more than they earn):

• Let’s assume our typical farmer earned Rs 10,000 in Q1 2019.
• This year, since agricultural income went up by 5.7 percent in money terms, our farmer earned Rs 10,570.
• Our assumption says, last year he spent all of the Rs 10,000 that he had made.
• This year, to maintain the same level of consumption, he would have had to spend extra, because prices went up.
• Government data tells us that retail prices faced by farm workers went up by about 8.1 percent in the first three months of this fiscal.
• That means, our farmer spent Rs 10,810 this year to consume exactly what he did last year.
• So, the average farmer spent Rs 240 more than what he earned this year. His real income declined, even though his nominal income improved.

Reason To Believe That The Average Farmer Earned Less In 2020

There’s one more reason to believe that the average farmer earned less in 2020, even though the GDP data paints a rosy picture for the agricultural sector. That is, the rise in the number of farmers during the lockdown months compared to last year. CMIE’s data tells us that there were nearly 110 million farmers and share-croppers who were employed in Q1 last year. This figure excludes agricultural labourers. In Q1 this year, that number jumped to 122 million.

That’s a rise of 11 percent in just the number of active farmers. That is almost double the nominal growth in agriculture.

A very rough way to look at the impact of this higher load of farmers – most probably because of the reverse migration we saw in the lockdown months – would be to divide nominal agricultural GVA by the number of working farmers in each of the quarters.

• If we take Q1 of 2019, we get an average nominal GVA of Rs 64,750 per farmer, which drops to Rs 61,700 in Q1 this year. That’s a decline of 4.7 percent in nominal income.
• Of course, this number is only a rough indicator, since we do not have the data for agricultural workers and those working in dairy farming, poultry, horticultural and other allied activities. But, it still does give us a broad idea about the decline in average farm incomes.

What Modi Needs To Do To Nurse Indian Economy Back To Health

One thing is clear: that the Modi government hasn’t done enough to stem this collapse. It has to spend much more to revive investment – both in the private and government sectors. It has to cut taxes to revive private consumption. It has to stop its deflationary economic policies to make sure producers have a price-incentive to increase output. There is a Rs 14 lakh crore drop in private consumption and investment in the first three months alone. Even if that reduces, the net drop over the next three quarters will not be less Rs 20-25 lakh crore. This huge hole cannot be filled with the government’s current loan-mela policies.

The collapse in our economy is a chance to reorient India towards a manufacturing-driven country that caters to the mass-market, instead of just the top 10 percent of consumers.

PM Modi has a huge opportunity to nurse India’s economy back to health, and at the same time make it more physically fit. Modinomics has failed to deliver. So, we need a completely new Modinomics 2.0.

(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.)