GDP Numbers: It Will Get Worse Before....

The latest numbers are a foreboding of the grim times ahead.

GDP Numbers: It Will Get Worse Before....

It has come as a "pleasant" surprise. The just-released GDP growth numbers for the last quarter of fiscal 2019-20 ending March report a 3.1 per cent growth rate. That means the GDP growth rate for the full year is 4.2 per cent. The manufacturing sector has however shown a negative growth, as has construction. The real good news seems to have come from the agriculture sector that has recorded a 5.9 per cent positive growth. But that's where the good news ends.

Figures released for April, 2020 for the core sector that includes key industries like oil, steel, power and cement show a whopping 38 per cent decline in output. The steel and cement industries have recorded negative growth of 85 per cent. That shows the extent of bloodbath unleashed on the Indian economy by the stringent lockdown imposed in late March. Experts will debate the numbers and details. That won't be of much help to ordinary Indians who see a bleak year ahead.

In any case, the GDP growth rate had been slowing since mid-2018. Some ascribe it to the delayed effects of the poorly implemented and executed demonetization of November 2016 and the new GST regime which came into being in July 2017. Many more ascribe it to the virtual freeze in credit offered by banks and other financial institutions as they struggled with the acute and seemingly unsolvable problem of bad loans or non-performing assets. From 7.1% in the first quarter of fiscal 19, the GDP growth rate had plunged to 4.7 per cent by the third quarter of fiscal 20. And now this.

But if one were to go by what lies in store for the Indian economy, finance minister Nirmala Sitharaman would grab these weak numbers with both hands. At least they are in positive territory. Even members of the Narendra Modi regime and its most ardent fans have reluctantly come to the conclusion that the Indian economy will actually shrink this fiscal. The most optimistic forecast is by the IMF which says that the Indian economy could grow by 1.9% this fiscal. Nobody else seems to share that view including the Reserve Bank of India. The State Bank of India thinks the economy will shrink by 4.7 per cent. Rating agencies S&P and Fitch contend that GDP will actually decline by 5 per cent this fiscal. Investment bank Goldman Sachs has the same numbers while UBS forecasts a 5.8 per cent decline in GDP this fiscal. The last time something, like happened with the Indian economy, was more than 40 years ago when GDP actually declined by 5.7 per cent in 1979-80.

Any recovery will be slow and painful. As per the latest estimates of the Centre for Monitoring the Indian Economy, the unemployment rate in India has shot up to more than 27 per cent. That means more than 125 million Indians who belong to the aspirational lower middle class have no money as they have used up whatever savings they had in the last three months. They will be in no position to buy even cheap mobile phones, fans, gas stoves, clothes; forget about the more expensive aspirational products like two-wheelers. Things are not very different in the so-called organized sector where mass layoffs by companies ranging from Uber to Swiggy have become daily news.

Sure factories, construction sites and offices will open soon (many already have) as the stringent lockdown ends. But it will take time for the embittered migrant workers who went back to their home towns and villages to make a trip back to the cities which are commercial hubs. Most importantly, there are lessons from behavioral economics. Uncertain and wary of the future, even those with regular monthly incomes will tend to postpone purchases. And investor confidence will return only when they see consumer confidence return. For policymakers, getting consumer and investor confidence back will be a monumental challenge, despite the Rs 20 lakh crore stimulus package announced some time back.

It will not be Apocalypse for the Indian economy. But it will be a bloody and painful year ahead.

The above article has been contributed to Mumbai Live by Sutanu Guru.