Unlock Kiya Jaye

The Economic Times     3rd September 2020     Save    
QEP Pocket Notes

CONTEXT: The National Statistical Office(NSO) has released India’s first-quarter Gross Domestic Product (GDP) data, showing a contraction of 23.9% which creates conditions for low base effect and makes V-shaped recovery inevitable.

State of the Economy

  • Contraction in Real GDP: to the tune of 23.9% on constant prices in Q1 2020-21.
  • Reason for contraction is various stages of lockdown and unlock, which disrupted the supply chain.

Positivity in the Economy:

  • Decline stringency of lockdown: According to Oxford Government Response Tracker (max. value 100)

, India scored 100 on March 25 and April 1, 96.3 on May 1, 75.46 on June 1 and 79.63 on August 15.

  • Not the worst GDP decline since 1947: since quarterly GDP was calculated after 1996.
  • Not the worst decline in the world: since the United States’ GDP contracted by 32.9% in Q2 2020-21.
  • Inevitable V-shaped recovery: due to steep decline in 2020-2021, creating a low base effect.
    • In 2019-20 there was a base value, which faced the anomaly of 2020-21(COVID) creating a low base. 
    •  In 2021-22, there will be positive growth as compared to 2020-21, but real positive growth can only be witnessed after 2022-23.
  • Unqualified allegation against NSO’s data collection: An argument is advanced about National Statistical Office (NSO) not estimating unorganized sector accurately, which is misleading on two counts:
    • Constant price gross value added (GVA) decline was 50.3% for construction, and 47.0% for trade, hotels, transport and communication, both primarily unorganized.
    • Assuming NSO estimated unorganized sector with some error rate before COVID, unless there was no abrupt distortion due to COVID in data, the error rate would be the same.

Challenges to the Recovery:

  • Export not a driver of growth: due to trade wars, rise in protectionism and supply chain disruptions by lockdowns.
  • Legacy Impact on Economic agents: such as
  • On Individuals: in the form of mortality, morbidity and adverse human development outcomes.
  • On Enterprises: morbidity, mortality and high non- performing assets (NPAs). 

The way forward: Unlock 5.0

  • Offsetting Negative effects of COVID: various supply-side steps have been taken by the Government of India under this regard.
  • Increasing Public Expenditure: since it is more effective than reducing tax rates.
    • But timing and sequencing of this have to be right — not when the stringency index is still at 79.63 and supply curves are inelastic.
  • Amendments to taxation: various steps can be taken to increase tax revenue without reducing the tax rate, such as:
    • Direct tax Reforms
      • Removal of exemptions 
      • an increase in effective tax rates for many entities, including unincorporated enterprise
      • Mute demands for tax -rate reductions.
    • GST: Revenue neutral GST rate should be 16%( currently at 11.5%).
QEP Pocket Notes