Economists say: No more a recession, India headed towards ‘depression’
The National Herals
June 21, 2020
The Indian economy is in a tailspin and India may actually be looking at something worse than a recession. India has never faced a sustained long-term downturn in economic activity in its 73 years of existence as an independent country. But there is now every possibility that India is looking at a ‘depression’ for the first time in its history, a possibility flagged by several economists.
While everyone now has accepted the inevitable, that the GDP will contract in the current financial year (2020- 2021), the estimates vary. The World Bank pegs it at 3.2 per cent while Crisil puts it at 5 per cent. An RBI survey paints the rosiest picture as of June 10, saying that the economy will contract by only 1.5 per cent. However, several economists warn that the impact will likely be much worse. Surajit Das, assistant professor at JNU’s Centre for Economic Studies and Planning (CESP), puts a perspective to the situation.
Veteran economist Arun Kumar in fact thinks the contraction of GDP in the months of the lockdown has been even more severe. “I would say about 75 per cent of the GDP was wiped out in April and about 65 per cent in May. Exports, investment and consumption, all three engines of growth went into a tailspin,” says Kumar. Kumar goes further in saying, “India would be the first country in modern history to face a depression. It would take at least three to four years to emerge out of it.” “In the current fiscal, the GDP is set to contract by at least 30 per cent. My estimate is that from Rs 204 lakh crore, our GDP will come down to Rs 130 lakh crore. Tax to GDP ratio will fall from 16 per cent to 8 per cent. In such a situation, it would be difficult for the government to pay salaries or finance the defence budget.”
Liquidity infusion into banks is meaningless unless that money reaches the economy. Loans at lower interest will simply be used by old borrowers to service old loans and not get translated into aggregate investment. Already, non-food credit offtake growth is in the negative. Kumar has prescriptions for the government. He calls it the survival package. “See, at least 20 crore people have lost their jobs. If you take 4 persons per family, 80 crore people are looking at penury and starvation if the government does not step in. They have fallen below the poverty line. Even if the government pays them half of the World Bank’s Extreme Poverty Line wage of $1.99 that is $.99, that will cost the exchequer around Rs 18 lakh crore per annum. Adjusted with MGNREGA and other schemes, the government will still need to marshal an additional Rs 15 lakh crore.” So assuming health expenses of Rs 2 lakh crore and a bare-minimum survival package for the micro sector at Rs 6 lakh crore, the government will have to find an extra Rs 24 lakh crore which will push fiscal deficit to almost 50 per cent of the GDP.
The study says India’s absolute GDP is likely to struggle to even come back to the 2019-20 level by 2023-24, which is the last year of this government’s current term. This is the same thing Kumar has said.“As things stand, and the government retains the 2020-21 expenditure budget for 2021-22 as well, it is likely that 2021-22 will witness a GDP growth rate of -8.8%. This is a frightening thought since it means that the country could experience a full-blown depression – the first in our history as an independent nation,” says Sen.
The Indian economy was already in a bad shape, reeling under the long-term effects of Demonetisation and a hasty implementation of an ill-conceived GST plan. COVID-19 came as the proverbial Black Swan to hammer the nails into India’s economic engine.
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