May 27, 20213 min read

COVID-19 and the economy | The mirage of growth numbers

There was an emerging euphoria about the rebound in the economy during the last quarter of FY21. It was widely acknowledged that owing to a low base in Q4-FY20 and H1-FY21, growth numbers would be attractive, leap-frogging to the FY20 number by the far-end of FY22 and re-commencing the growth trajectory from FY23 onwards.

The ferocious COVID-19 second wave has halted the recovery trajectory and given everyone a reality check.

After initial expectations of double-digit growth for the economy by various institutions, the resurgence of the pandemic has dented the recovery process and downward revisions to single-digit growth projections have been pervasively resurfacing. However, analyst expect the second wave to have a muted impact on the economy with vaccination drives and better healthcare preparedness.

Despite supply chains remaining less impacted during the second wave, the widespread nature of the contagion impacting both urban and rural regions and percolating to the skyscrapers in the urban areas, the impact on the aggregate demand could be much severe than the previous lockdown and is likely to be hidden in the ‘mirage’ of macro-economic growth numbers.

Azim Premji University’s recent release of the State of India Working 2021 report, which provides a comprehensive and micro-level assessment, is an eye-opener and the 15 percent contraction estimated in H1-FY21 is just the tip of the iceberg. Monthly per-capita income fell by 17 percent during the pandemic, primarily affecting daily-wage workers, self-employed and temporary salaried.

During April and May 2020, the poorest 20 percent of households lost 100 percent of their income, while households in the top echelons of the income bracket suffered losses of less than 1/5th of their pre-pandemic income. About 230 million additional individuals i.e 16 percent of India’s population fell below the national minimum wage threshold (Rs 375 per day). Estimates suggest that poverty rates to have increased by 15 percent (rural) and 20 percent (urban) on account of the pandemic disruptions. About 20 percent of the households reported that food essential had not recovered even six months after lockdown.

The impact on unemployment was the most severe on women with 47 percent suffering a permanent job loss. If this has been the severity following the first wave, the impact on aggregate demand following the second wave, which has four times the case-load, could be ravaging.

One can argue here that the economy is better prepared based on the lessons from the first wave, speedier inoculations and the pent-up demand narrative will drive the economy again from H2-FY22. However, the question is: are we looking only at the top 5 percent of the individuals to take the economy forward? ‘Forced savings’ during the first lockdown translated into spending on discretionary items during the second half of FY21, but this time around, with cash flows diverted towards essentials and healthcare during the second wave by a larger section, the resurrection of discretionary spending is likely to be more prolonged.

Similar to the consumption and income of individuals, the impact on the industrial segment of the economy has also been immense and the second consecutive year of de-growth in industrial productions reflects de-industrialization in the economy. Even prior to the outbreak, industrial output grew at a subdued pace of 3.1 percent from FY16 to FY20. Although this can be conjectured to weak demand for industrial products, the bank credit off-take to industries has averaged 2.2 percent during FY16 to FY20 with medium-scale enterprises registering a fall of 3 percent and micro-enterprises recording close to nil growth.

To alleviate the impact of nation-wide lockdowns on industries, the central government did extend an emergency guarantee-based credit line to MSMEs and there has been a 28.8 percent growth registered in credit to medium scale enterprises — but outstanding credit to micro-enterprises grew only by 0.5 percent.

Additionally, industrial credit by the NBFCs has registered double-digit contraction during each quarter commencing March 2020 till December 2020. Large-scale industries look confident, albeit lower than the start of 2021, about a pick-up in recovery in FY22, but both waves of the pandemic would have strongly disrupted the MSME business operations.