Panchanan Das
Professor of Economics
Department of Economics
University of Kolkata (financial blog on behalf of GLARiUS – www.glarius.com)
GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.
The nature of recession today because of the outbreak of COVID-19 is completely different from that of the Great Recession of the 1930s. Macroeconomic risks brought on by the pandemic could be even more severe.There is a trade-off between the severity of the recession and the health consequences of the pandemic. The containment policies undertaken by the State in most of the countries including India in the form of economic lockdown primarily to maintain social distance exacerbate recession but raise welfare by reducing the probability of new infection and death toll caused by the pandemic.Different sectors of the economy will be affected adversely depending upon its intensity, spread and duration of the pandemic.
Till now, as the cost of externality is very high because of absence of vaccination and treatment of this disease, the State has to impose more aggressive policy in the form of near complete lockdown or in some cases complete lockdown of the economy to reduce the probability of being infected. Total number of infected people and number of death due to this disease is significantly less in India till now despite the country has the highest population density and more populous than USA and Italy. But,daily growth rate of infected people is significantly higher (above 10 per cent) than the rate even in USA (3.5 per cent) as on April 19, 2020. In India, although absolute number of death is the least compared to other countries, the death rate is larger than the rate in USA, the country showing the highest death toll in the pandemic.
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Global supply chains, trade, transport, tourism, and the hotel industry have been affected severely because of the pandemic. The WTO (World Trade Organisation) indicated a declining trend in world trade volume in the early 2020, and is expected to be debilitated further by the adverse shock of the health crisis. The OECD (Organisation for Economic Cooperation and Development) estimates suggest that if the shutdown continues for three months with no offsetting measures, annual growth of global GDP could be between 4-6 percentage points lower than it otherwise might have been. In that case, the growth rate of real GDP would be negative for many countries during the post-pandemic regime. The IMF’s latest assessment is also roughly similar: global growth could be lower by 3 percentage points or more in 2020 relative to 2019 because of the outbreak of COVID-19 (IMF, 2020). The global economy is expected to collapse into greater recession in 2020.
Indian economy, as for the economy of other countries, has experienced a significant structural break at the beginning of the last quarter of 2019-20 directly because of lockdown of the domestic economy and indirectly by the global recession because of the outbreak of the COVID-19 pandemic. Spill overs are also being transmitted through domestic and global financial markets. These effects would accentuate the growth slowdown which started since the first quarter of 2018-19 in India (Table 1).
Table 1 Quarterly growth rates of real GDP at market price
Components of GDP
|
2018-19
|
2019-20
| ||||||
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4*
| |
Private final consumption expenditure
|
6.7
|
8.8
|
7
|
6.2
|
5
|
5.6
|
5.9
|
4.9
|
Government final consumption expenditure
|
8.5
|
10.8
|
7
|
14.4
|
8.8
|
13.2
|
11.8
|
4.9
|
Gross fixed capital formation
|
12.9
|
11.5
|
11.4
|
4.4
|
4.3
|
-4.1
|
-5.2
|
2.5
|
Exports
|
9.5
|
12.5
|
15.8
|
11.6
|
3.2
|
-2.1
|
-5.5
|
-2.8
|
Imports
|
5.9
|
18.7
|
10
|
0.8
|
2.1
|
-9.3
|
-11.2
|
-3
|
GDP at market prices
|
7.1
|
6.2
|
5.6
|
5.7
|
5.6
|
5.1
|
4.7
|
4.7
|
Note: Projected growth
Source: National Statistics Office
A sequential slowdown started in the Indian economy from first quarter of 2018-19 and the growth rate reached below 5 per cent in third quarter of 2019-20 (Table 1). The widening incidence of COVID-19 will produce the downward pull further. Private investment measured by gross fixed capital formation (GFCF) showed actual fall in the second quarter of 2019-20 and the rate of fall increased in the next quarter. Negative growth was observed in foreign trade (both exports and imports) during this period as well. The decline in merchandise exports started in second quarter of 2019-2020 because of the fall in shipment of engineering goods, gems and jewellery, cotton and handloom products.
Positive growth in aggregate demand is sustained by consumption demand driven mainly by the upward movement in government expenditure (GFCE). The slower growth of consumption expenditure on final goods by the households (PFCE) in 2019-20 as compared to previous financial year was caused by the deceleration in real wages and downturn in labour-intensive exports. Demand for consumer durables like small passenger vehicles continued to decline in February 2020. The rise in revenue expenditure partly due to pay hike by the 7thPay Commission and decline in gross revenue under corporation tax deteriorated fiscal deficit of the central government during 2019-2020.
On the supply side, the slowdown in growth of gross value added (GVA) was caused by the deceleration in industrial and services activities (Table 2). Agriculture and allied activities, on the other hand, accelerated in the second half of 2019-2020. Industrial deceleration led by the manufacturing sector deepened the slowdown because of low domestic and external demand. Services sector activities contributed the most to (GVA) although its growth rate declined in 2019-20. Agriculture and allied activities also provided momentum to some extent to GVA in second and third quarter of the past financial year. The industrial sector remained declining because of low demand conditions.
Table 2Quarterly growth rates of real GVA at basic prices
Components of GVA
|
2018-19
|
2019-20
| ||||||
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4*
| |
Agriculture, forestry and fishing
|
3.8
|
2.5
|
2
|
1.6
|
2.8
|
3.1
|
3.5
|
5
|
Industry
|
7.8
|
4.7
|
4.4
|
1.4
|
3.2
|
0.1
|
0.1
|
2.3
|
Mining and quarrying
|
-7.3
|
-7
|
-4.4
|
-4.8
|
4.7
|
0.2
|
3.2
|
2.6
|
Manufacturing
|
10.7
|
5.6
|
5.2
|
2.1
|
2.2
|
-0.4
|
-0.2
|
1.8
|
Electricity, gas, water supply and
|
7.9
|
9.9
|
9.5
|
5.5
|
8.8
|
3.9
|
-0.7
|
6.5
|
Services
|
7.3
|
7.2
|
7.3
|
8.3
|
6.7
|
6.8
|
6.4
|
6.1
|
Construction
|
6.4
|
5.2
|
6.6
|
6
|
5.5
|
2.9
|
0.3
|
3.2
|
Trade, hotels, transport, communication
|
8.5
|
7.8
|
7.8
|
6.9
|
5.7
|
5.8
|
5.9
|
5.1
|
Financial, real estate and professional services
|
6
|
6.5
|
6.5
|
8.7
|
6.9
|
7.1
|
7.3
|
8
|
Public administration, defence and other services
|
8.8
|
8.9
|
8.1
|
11.6
|
8.7
|
10.1
|
9.7
|
6.7
|
GVA at basic Prices
|
6.9
|
6.1
|
5.6
|
5.6
|
5.4
|
4.8
|
4.5
|
5
|
Note: Projected growth
Source: As for Table 1
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The lockdown of the domestic economy in the wake of the outbreak of COVID-19 has disrupted manufacturing activities which experienced negative growth just before the outbreak (Table 2). In the manufacturing sector, dislocations of labour adversely impacted automobiles, electronic goods and appliances, and apparel. Services such as trade, tourism, airlines, the hospitality sector and construction have been affected badly in a greater extent.
The conventional signals for forecasting are heavily conditioned by the depth, spread and duration of COVID-19 and other characteristics of the pandemic, and forecasting at this moment is really a challenging task(Ferguson et al. 2020). However, it could be easily understandable that the slowdown could be more long-drawn-out in the awful situation as the duration of COVID-19 extends longer. Different sectors of the economy will be affected adversely depending upon its intensity, spread and duration of the pandemic. According to World Bank’s estimate, the expected growth rate of India's economy would be around 2 per cent during 2020-21 fiscal year. Asian Development Bank has estimated that growth rate of India's economy reduced to 4 percent during this period.
