What Should We Make Of The Advanced Estimates For FY 2020-21?

A series of economic data have been released by various agencies over the last few days including the regularly published data on goods and services tax (GST) collections, other high-frequency indicators and the routine advanced gross domestic product (GDP) estimates at current and constant prices that are released by the Ministry of Statistics and Programme Implementation (MOSPI).

Before we look into the data, I must appreciate MOSPI for their redesigned website and an attempt to make data far more readily available and accessible for researchers such as myself.

The new website also includes interesting graphical representation of various dashboards and you should visit them if you are interested to know more about things such as India’s progress on the Sustainable Development Goals (SDGs).

However, the purpose of this article is not to appreciate the website but to better understand what the advanced estimates indicate, and how to look into them.

As someone who has a keen interest in forecasts, let me begin by reiterating my forecast for the GDP growth (or in this case, contraction) figures — that is, the level of contraction in Indian economy would be contained under 7 per cent, and that the advanced estimates along with forecasts of other institutions would be gradually revised upwards over the coming few months.

Let us for the moment, ignore the prospects of an upward revision and consider the contraction to be at 7.7 per cent as per MOSPI’s recent estimates. Let us also recall that the previous financial year, India registered a growth of 4.2 per cent well below its potential.

To put some context to the advanced estimates, GDP essentially measures the total value of goods and services produced in an economy during a particular period. Thus, it is a measure of level of economic activity.

Now, a lockdown meant limited economic activity for a period of close to three months or one fourth of the financial year in at least 60-65 per cent of our economy. Thus, we lost a sizeable amount of our economic output (or at least 15 per cent of it at the bare minimum) and that mobility restrictions continued across the world; the level of economic activity should have ideally been lower.

Thus, a 7.7 per cent contraction is not bad when one puts things in perspective but shows that the pace of normalisation of economic activity was faster than anticipated — a point that has been made repeatedly by several authors in the past. But many wonders just how did India manage to achieve such a remarkable turnaround?

The answer to that lies in the way India theorised and responded to the present pandemic. It is worth noting here that we are discussing only the pandemic induced slowdown, and not the growth slowdown that started in 2018 as both are fundamentally different kinds of challenges that require a different set of policy response.

The immediate response of authors, analysts and commentators was to ask for a stimulus — primarily a fiscal stimulus. The call for this grew stronger the moment a lockdown was announced by the Prime Minister.

A recent feature has been to term that the lockdown was enforced with a four-hour notice by the Prime Minister but nothing could be farther from the truth as several states had enforced either full state lockdowns, border closures or school closures well before the national lockdown. The government did direct cash transfers and other similar support measures to the bottom of the pyramid, but the key to revival lied in its other measures.

A lockdown — as often reiterated — was a challenge to the cash-flow problem of businesses.

That is, while they faced fixed costs, they were unable to generate cash to meet these expenses. This was bound to permanently deteriorate their balance sheets with the risk of several of them shutting shop.

It was this cash-flow mismatch that was the key constraint rather than the lack of demand that had to be addressed to prevent bankruptcies. The reason was that should the government even wish to give a stimulus, with markets shut, economic activity would not have taken place and the money would be unspent.

Thus, instead, the decision to defer taxes, interest moratoriums, additional credit and other such measures to help with the cash-flow mismatch became critical as they prevented massive bankruptcies that would have permanently destroyed the capital stock of the country.

While many view the problem in the economy as one of demand, I would point at an interesting paper by Professor Ludwig Straub and his colleagues at Harvard, whereby there is a supply shock that leads to a larger demand shock.

The pandemic was one such event where we witnessed a supply shock with subsequent demand shocks. That is, businesses were hit so they slashed wages and reduced employment — which further suppressed demand leading to a demand shock.

In the case of India, to a great extent our supply side measures prevented the demand shock from becoming significantly large. The additional incentives to hire more people by a type of wage-subsidy programme by bearing the costs of EPFO compliance etc, further helped bring back some jobs — and this is likely to continue encouraging companies to scale should the market conditions continue to remain attractive.

Another possible support came from the sizeable fiscal stimuli announced by countries across the world which had a positive impact on our economy through the exports channel. There is a real possibility of supply chains shifting into India which will further ensure we benefit from the swift economic normalisation in advanced economies.

Our ability to produce vaccines at a humungous scale has already amazed the world with regards to our capacity which makes us, perhaps, the only alternative to China as a manufacturing country that can give companies a similar scale.

The other important variable — and one that gets too ignored is interest rates. Many have chided me over the years for my obsession with a low interest rates regime as they point how low rates have not benefitted the West.

Yet, I point that low rates are a necessary but not sufficient condition for faster growth, that is, growing with high real rates is far more difficult than it is with moderate or competitive real rates. That we reduced rates is well recognised — and so we should also recognise that the revival, whether in real estate or in automobile demand is an outcome of the low rates.

Most consumers tend to finance these products and thus, lower EMIs or rate of interests acts as a nudge for these sectors. The other good thing for real-estate as that states started cutting stamp-duty etc which further helped the sector.

When the pandemic started, many were quick to respond with the conventional macro-playbook but that was the time to go back to the basics and theorise with the kind of economic crisis that was likely to follow.

India did well to take a step to assess the situation and then adopt a calibrated response to contain the damage as much as possible.

Consequently, it has done well in preventing massive deaths and containing the economic costs of the lockdown. Of course, other challenges and constraints do remain, but let us take a moment to appreciate what has been achieved.