India officially entered a technical recession last week.
The National Statistical Office’s estimates for the Gross Domestic Product growth between July and September 2020 came in at -7.5%, meaning growth has been negative for two successive quarters, after the economy contracted a whopping 23.9% in the April-June quarter. That means India is officially in a recession.
Yet, despite this development and the massive contraction in economic output, the response to the numbers was surprisingly positive.
That is because observers were expecting worse.
The Reserve Bank of India had predicted a contraction of 8.6%. A poll of analysts by Reuters turned up a -8.8% figure. And some had pegged the number as high as -10%. Compared to that, a figure of -7.5% indicated that the the economy was actually doing better than most expected it to do.
Better than expected
“The second quarter GDP growth number is better than our expectation,” wrote Anagha Deodhar, an economist with ICICI securities. The Federation of Indian Chambers of Commerce and Industry called it a “pleasant surprise” and said it was proof that “the Indian economy is on a sharp recovery mode.”
The numbers also put India in a better position relative to many other countries, a turnaround from the quarter before when India’s -23.9% figure placed it at the bottom of just about any list of major economies.
Policymakers are already taking this figure as an indication that things can only get better from here. The Reserve Bank of India’s monthly bulletin for November pointed to “brightened prospects”, saying if they last, then “there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in Q3:2020-21 [October-December 2020], ahead by a quarter of the forecast provided in the resolution of the monetary policy committee”.
Union Home Minister Amit Shah has also said that he hopes the GDP figure for the next quarter will be positive.
Where is all this positivity coming from, even as the pandemic continues to rage and Indian states begin discussing returning to lockdowns?
Agriculture remains strong, as it was in the previous quarter. Construction bounced back majorly relative to the previous three months, though its contribution to the GDP figure still in the red. Most surprising of all is manufacturing, which registered a 0.6% growth after contracting by nearly 40% in the quarter before.
Some of that may be explained by a low base, since the numbers from the year prior were hardly anything to write home about. Yet the fact that the number indicated some growth at all was significant after the huge hit manufacturing took in the April-June quarter, when India was under a harsh national lockdown.
Alarm bells
Not everyone thinks this is good news, however.
The manufacturing GDP figure usually moves in tandem with the Index of Industrial Production, which is another measure of industrial output. Yet, between July and September, the IIP figure stood at -6.7% compared to the 0.6% growth that the Gross Value Added number shows.
What could this mean?
“We believe one possible explanation could be the stellar corporate GVA numbers in the second quarter on the back of a massive purge in costs (a recent RBI study also confirms that), particularly on employees,” wrote Soumya Kanti Ghosh, group chief economic advisor to the State Bank of India. “The downside to such cost-cutting could be significant labour market disruptions, increasing inequality and thus a material impact on consumption.”
In other words, the positive numbers are the result of companies cutting costs, rather than earning more money from their products. If that is, indeed, the reason for the growth in manufacturing, it is a deeply troubling sign for an economy that is already struggling to generate demand.
As Ghosh wrote, “The disruptions in the labour market... could be a risk for future consumption and inequality. There have been more aggressive cuts in employee costs in the case of small companies with a turnover of up to Rs 500 crore... This raises clear concerns regarding inequality.”
The other side of the positive manufacturing figure is the expectation that the quarter saw a big build-up of inventory, which normally happens earlier in the year ahead of the festive season, but may have been concentrated in the July-September period because of the lockdown. Again, if this is the reason for the growth in manufacturing, it is a problem since it will not be sustained.
‘Almost certainly worse’
Pronab Sen, the former chief statistician of India, estimated that the accurate picture of the July-September quarter would be much lower than 0.6% – and that, contrary to the expectation that things will only get better from here, the October-December GDP figure will be a bigger contraction than the three months before it.
The GDP number will “almost certainly be worse”, Sen told the Wire, adding that over the whole financial year, the contraction figure “would still be in the low double digits.” This is in contrast to predictions from others, like SBI, who are now expecting a smaller annual contraction than had earlier been expected.
GDP numbers have seen major revisions over the past few years, and the added complexity of the pandemic year means that they are possibly even more likely in 2020-2021. Moreover, the fact that Covid-19 is still spreading, and that a national vaccine rollout will take years, makes any projections complicated.
Despite that, the numbers seem to make it clear that demand is in danger – and neither the industrial sector nor the government are doing enough to resurrect it. As the conversation moves to next year’s budget, expected in February, focus will move to the government’s ideas for a way forward. Will Finance Minister Nirmala Sitharaman finally be willing to open the spending spigot that has been kept mostly shut for much of this year?