Engineered setback: Government's COVID response aggravates economic crisis

The COVID-induced devastation and the state’s tepid response have enhanced the severity of the current economic crisis and official claims of a V-shaped recovery amount to mere wishful thinking.

Migrant workers from Bihar walking back home from Ghaziabad on the outskirts of New Delhi on May 13, 2020. The COVID-19 pandemic devastated the economy and livelihoods, leading to greater inequality.

Recent evidence is telling. A buoyant stock market, large foreign reserves, a billionaire corporate elite and the rising number of start-up unicorns distract attention from the real India that is ailing. In fact, these supposedly positive features, often played up by official spokespersons and sections of the media, are part of the problem, as were India’s high, even if volatile, gross domestic product (GDP) growth rates in the first 15 years of this century.

When growth slowed, spokespersons of the National Democratic Alliance (NDA) government blamed it on the coronavirus pandemic; now they claim that the Indian economy is experiencing a sharp, ‘V-shaped’ recovery from the lows to which it had descended during the initial phase of the COVID-19 pandemic.

However, recently released GDP estimates for the second quarter (July-September) of financial year 2021-22 do not support that sanguine view. Those figures suggest that after having recorded a 20.1 per cent growth rate during the first quarter of 2021-22 (relative to the corresponding previous period of 2020-21, when the economy contracted by 24 per cent), the country’s GDP registered a much smaller 8.4 per cent growth in the second quarter relative to the same quarter a year earlier. Apparently this was enough for the government’s public relations machinery to declare that India had overcome the adverse effects of the pandemic and was all set to return to a high-growth trajectory.

Recovery and growth

However, if we avoid the hype, there are two questions that need to be answered.

The first is whether the economy has recovered the ground lost during the first two quarters of 2020-21 when a delayed and anaemic response to the pandemic and a brutal lockdown had devastating consequences. Over the first half of financial year2020-21, the economy contracted by 16 per cent relative to the corresponding previous period. As compared with that, over the first half of the current financial year (2021-22), growth was a positive 14 per cent, implying that the economy is not back to where it was before the damage wrought by the pandemic and the government’s response.

In absolute terms, GDP at 2011-12 prices in the first half of the 2019-20, the pre-pandemic year, was Rs.71,28,238 crore, whereas the comparable figure in the first half of 2021-22 was Rs.68,11,471 crore, or 4.4 per cent lower two years later.

The second question is where the economy stands today relative to where it would have been if the average growth recorded during the four quarters of 2019-20 had been sustained through the subsequent six quarters ending with the second quarter of 2021-22. If that growth had been sustained, the GDP in the first half of 2021-22 would have been Rs.76,50,866 crore at 2011-12 prices or 12 per cent higher than the actual level recorded in that period.

India has definitely not regained the economic ground it lost during the pandemic. That is a matter of greater concern because even before the pandemic the country had been losing economic ground, with growth slowing sharply over nine quarters from 8.2 per cent in fourth quarter of 2017-18 to 3.1 per cent in the fourth quarter of 2019-20.

The pre-pandemic deceleration in growth was driven by both medium- and short-term factors. Among the medium-term factors, two stood out. One was the unwillingness of the government, especially after adopting the Fiscal Responsibility and Budget Management Act in 2003, to use the fiscal lever to drive growth. While its neoliberal fiscal policy, involving tax “reform” aimed at incentivising private investors, resulted in stagnation or even a decline in resource generation through taxation, the fiscal deficit was reined in to appease financial capital. The consequence was a weak or near-absent fiscal stimulus.

Initially, however, this did not lead to a deceleration in growth, because credit from the predominantly public banking system was used to shore up private consumption and investment. The credit boom of the 2000s, on which GDP growth rode, could not, however, be sustained because the large loans diverted to corporate groups turned sour, with borrowers defaulting on their interest and amortisation payments. Repeated efforts to restructure these loans and ease the terms of borrowing, in order to ensure repayment, failed.

After much delay, the Reserve Bank of India pressured banks to recognise these bad loans for what they were and make provisions to cover for the losses incurred. This forced banks to rein in credit growth, undermining the credit-financed private demand push that had made up for the government’s fiscal conservatism. That was the second medium-term factor that brought the high growth of the 2000s to an end.

Demonetisation & GST

To this must be added the short-term factors that made a bad situation worse. One was the inexplicable decision to go in for demonetisation on completely irrational and spurious grounds, in what was nothing but an attempt to shock and awe the electorate. It had devastating effects on the economy, especially for those engaged in the informal sector; trends in this sector are not captured in official GDP estimates.

The other was the badly designed and poorly implemented Goods and Services Tax (GST) regime that squeezed government revenues even further. Put together, these developments triggered and subsequently intensified the growth slowdown.

The components of the pandemic-aggravated GDP slowdown point to widespread expenditure retrenchment. Private final consumption expenditure, which declined by 19 per cent in the first half of 2020-21 relative to the corresponding period in 2019-20, rose by just 14 per cent from that trough in 2021-22. Gross Capital Formation, which had declined by 28 per cent in 2020-21, just about managed to cover that loss. Underlying all this was the fact that government final consumption expenditure fell by 6 per cent in the first half of 2020-21 and rose by just 1 per cent over the first six months of 2021-22.

The effects of the slowdown in growth on the vulnerable sections were clearly visible.

According to results from the official Periodic Labour Force Surveys, the unemployment rate for males in the 15-59 age group rose from 2.2 per cent in 2011-12 to 6.6 per cent in 2017-18 and only declined marginally to 6.5 per cent in 2018-19. The corresponding figures for females were 2.5 per cent, 6 per cent and 5.5 per cent.

Those figures for females are significant because the labour force participation rate for females in the 15-59 age group fell from 33.1 per cent in 2011-12 to 25.3 per cent in 2017-18 and stood at 26.5 per cent in 2018-19.

Unemployment remained high despite the fall in the proportion of women looking for work.

It must be noted that the growth slowdown and rise in unemployment occur in a context of extreme inequality. Recent estimates from the World Inequality Lab indicate that in India, the income share of the bottom 50 per cent fell from 20.3 per cent to 13.1 per cent and stayed at that low level through times that have been extremely trying for the majority.

Worsening inequality

At the other end of the spectrum, the share in income of the richest 10 per cent of India’s population, which rose from 34.4 per cent in 1990 to 57.1 per cent in 2014, has remained at that level. The richest 1 per cent of India’s population accounts for more than a fifth of the nation’s income.

A corollary of this is widespread poverty. According to a United Nations (U.N.) study of October 2021, India topped the list of countries with the largest number of people living in multidimensional poverty, being host to 381 million multidimensionally poor people in 2015-16. There were, however, significant regional differences.

As per the NITI Aayog’s Multidimensional Poverty Index (MPI), 51.91 per cent of the population in Bihar was poor, followed by Jharkhand (42.16 per cent), Uttar Pradesh (37.79 per cent), Madhya Pradesh (36.65 per cent) and Meghalaya (32.67 per cent). On the other hand, Kerala registered the lowest poverty incidence (0.71 per cent), followed by Puducherry (1.72 per cent), Lakshadweep (1.82 per cent), Goa (3.76 per cent) and Sikkim (3.82 per cent).

Despite this context of extreme inequality, the government’s response to the growth slowdown only served to worsen the inequality in income and wealth. Banks have written off huge volumes of bad loans taken by large corporate groups and the banks have been recapitalised using taxpayers’ money.

Meanwhile, net direct tax collection, or gross direct taxes adjusted for tax refunds, declined in nominal terms from Rs.11.36 lakh crore in 2018-19 to Rs.10.49 lakh crore in 2019-20, or by close to 8 per cent. The factor dominantly responsible for this decline was the decision, in the midst of a demand recession, to favour the corporate sector with tax concessions announced in September 2019.

That ‘stimulus’ took the form of a huge reduction in the corporate tax rate from 30 per cent (or an effective rate of 34.61 per cent after surcharge and cess) to 22 per cent (or an effective rate of 25.17 per cent) for domestic companies that do not avail themselves of tax incentives or exemptions.

New domestic manufacturing companies incorporated on or after October 1, 2019, will pay corporation tax at a reduced rate of 15 per cent (which is an effective rate of 17.01 per cent) so long as they do not avail themselves of incentives and exemptions. Also, the government has reduced the minimum alternative tax (MAT) applicable to companies that do avail themselves of incentives and exemptions from 18.5 per cent to 15 per cent. That was a huge bonanza, which held back the growth in direct tax revenues.

A matter of concern is the way in which the government has sought to neutralise the loss in revenues following such sops to big business. Early in its term, the first Modi government had, in nine steps between November 2014 and January 2016, raised the excise duty on petroleum products from the levels it inherited of Rs.9.48 and Rs.3.56 per litre on petrol and diesel, respectively, by Rs.11.77 and Rs.13.47. Only a fraction of that hike was rolled back later.

The government again raised duties in July 2019, March 2020 and May 2020, to the extent of Rs.15-18 a litre.

This regressive reliance on duties on universal intermediates such as petroleum products raised the prices of most goods and services, especially those consumed by the poor. That would have squeezed consumption demand at a time when what the system needed was a demand stimulus. The engineered increase in income and expenditure inequality only worsened the tendency to recession.

What is shocking is the adoption of this policy stance when the economic devastation resulting from the COVID-19 pandemic called for hugely enhanced spending. Although Finance Minister Nirmala Sitharaman claimed that Budget 2021 would be one “like never before”, both the revised estimates for the 2020-21 financial year and the Budget estimates for 2021-22 did not imply any significant increase in spending. In 2020-21, when the pandemic was at its peak and called for enhanced health expenditure, emergency transfers to those devastated by the contagion and lockdown, and a proactive fiscal policy to accelerate the recovery, the total expenditure increased by just 13.4 per cent. In the preceding 2019-20 financial year, a normal year, the total Central expenditure rose by 16 per cent. Overall, Budget 2021-22 reflected the government’s persisting fiscal conservatism, with the total expenditure projected to rise by just 9.5 per cent in a year when the nominal GDP was projected to rise by 14.4 per cent.

Little support for poor

As tends to be the case, the casualty has been spending aimed at supporting the poor. Consider, for example, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). Expenditure in 2020-21 was estimated to be in excess of Rs.1,10,000 crore as compared with a budgeted Rs.61,500 crore and an actual expenditure of Rs.71,687 crore in 2019-20.

Workers deprived of their livelihoods, including migrants who returned to rural areas, had turned to the MGNREGS, resulting in a spike in allocations for the demand-driven scheme. Although the damaging effects of the pandemic continued to be felt, the budgetary allocation for the scheme for 2021-22 was placed at just Rs.73,000 crore, with the promise that more would be provided if the demand for work was higher than estimated. By early December, the allocated sum had been utilised.

In fact, more than 27 States and Union Territories had utilised more than 100 per cent of funds earmarked for them. Yet, the supplementary demand for grants of December 2021 provides for only an additional Rs.25,000 crore for the programme, whereas estimates from the ground suggest that at least double that sum is needed.

In sum, while the COVID-19 pandemic has damaged the economy in India as it has damaged economies elsewhere, the end of a growth episode riding on a credit bubble, the failure to address the resulting recession, and the state’s tepid response to the COVID-induced economic shock, have definitely made matters worse. The result is not just the severity of the current crisis that the second-quarter GDP figures underline.

That crisis will be prolonged, and expectations of a V-shaped recovery amount to mere wishful thinking. Policy definitely had a role to play in putting the nation in this predicament.