Onwards and Upwards

Context:  The latest Gross Domestic Product (GDP) forecasts give a hope that the economic decline will be restricted for the full year to be in single digits.

Positives for India’s recovery:

• Narrowing of nominal Gross Domestic Product (GDP) loss: From Rs 11.1 lakh crore in 1^st quarter to Rs 1.98 lakh crore in the 2^nd Sector-wise data includes -
  • Agriculture: has added 0.4% to GDP in both the quarters.
  • Manufacturing: including construction, loss reduced by 91% from the first quarter. This is because of massive purge in costs.
  • Trade and Services: Services has reduced its losses by 43%, while the losses incurred by the trade sub-segment have fallen by a staggering 80%.
• Decrease in nominal GDP loss: From Rs 11.1 lakh crore (1^st quarter) to Rs 1.98 lakh crore (2^nd quarter).
• Changes in innovation: amidst pandemic -
  • Accelerated the pace of technology adoption in the banking system in India;
  • Technology adoption in the credit guarantee scheme for Micro, Small and Medium Enterprises (MSME) has been of resounding success.
  • Data consumption in rural India on the network of common service centres and special purpose vehicles also jumped by nearly 100% during the lockdown.
• Proactive approach of the Reserve Bank of India (RBI):
  • Assuaged the market that liquidity problems will not translate into solvency problems.
  • Gave explicit forward guidelines of rates for an extended period for better market sentiments.

Challenges to India’s recovery:

• Increase losses in certain sectors: including financial, real estate and professional services and public administration segment, where losses have jumped by 50%.
• Data discrepancy: in the second-quarter numbers, which amount to 1.7% of GDP; moreover the job of data collection by the Central Statistics organization has become difficulty amidst pandemic.
• Rising inequalities: Due to cost-cutting by manufacturing units, there were significant labour market disruptions, increasing inequality and thus a material impact on consumption.
  • Firms were more likely to terminate the employment of temporary workers, compared to that of permanent workers (owing to their skill premium). - NCAER’s Business Expectations Survey.
  • In India, inequality has increased but not significantly worsened. OECD Data
• Threat of high Incremental Capital-Output Ratio (ICOR): The ICOR in India has increased from 3.8 in 2016-17 to 4.9 in 2018-19 and is expected to further deteriorate to 6.9 in 2019-20.
  • Delays in the completion of projects, lack of complementary investments in related sectors and the non-availability of critical inputs can all lead to a rise in ICOR.
  • The higher the ICOR, the less efficient the use of capital.