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  Opinion   Columnists  06 May 2020  Aakar Patel: First time in a generation, India is staring at a recession

Aakar Patel: First time in a generation, India is staring at a recession

Aakar Patel is a senior journalist and columnist
Published : May 6, 2020, 7:31 pm IST
Updated : May 6, 2020, 7:31 pm IST

The Economic Survey 2018-19 said over nine out of every 10 Indian workers are in this informal sector

India’s GDP, or the total value of goods and services produced by our country, is derived primarily from formal sector data. PTI Photo
 India’s GDP, or the total value of goods and services produced by our country, is derived primarily from formal sector data. PTI Photo

Let’s look at the economic fallout of the current lockdown today and why measuring it will be easier than such shocks have been in the past. One of the problems India has as a modern economy is that of data. This is something the government and the Prime Minister have acknowledged and they have tried to change this lack of information, but without much success. The problem, briefly described, is as follows.

India’s economy is largely in the informal sector. The informal sector means economic activity which is not taxed directly, and which may not even be registered.

 

Almost all businesses that use only family labour, paanwalas, sabziwallahs, many shopkeepers, all labourers and most labour contractors, most farmers, domestic workers, many traders and some professionals come under this informal economy. The Economic Survey 2018-19 said over nine out of every 10 Indian workers are in this informal sector, meaning it’s much more relevant and significant than the formal sector.

However, we don’t even know the size of the informal economy. By its very nature, of course, it doesn’t have deep engagement with the State in terms of tax payments or being regulated, so the government doesn’t know of its existence. The second issue is that some of this informal economy also operates on the formal side. Some small businesses work as suppliers to larger businesses that are formal, meaning regulated and taxed. Many small businesses are partially tax-paying and partially regulated. All this makes collection of data and therefore the estimation of economic growth very difficult.

 

India’s GDP, or the total value of goods and services produced by our country, is derived primarily from formal sector data. This data is used and it is assumed they have a relationship with the informal sector and thus a national figure is estimated.

The formal sector, though not very big, has good data including high frequency data like the sales of automobiles. Companies like Maruti and Bajaj around the first of every month put out the total number of vehicles they have sold to their dealers in the past month. On May 1, Maruti said for the first time in its history it achieved zero sales in April due to the lockdown, and probably something close to zero in production as well.

 

But such accurate and frequent indicators are absent from most of the economy, which means we need to rely on guesswork. This is a problem and it is why the Prime Minister and others in the government have been trying to change this, but without much success. So why is this relevant at this point? Let’s compare the current crisis to the one that was similar: the demonetisation announced on the night of November 8, 2016.

It became clear around mid-December that this would lead to economic difficulties and wipe out many small businesses. The government denied this would happen, and challenged its opponents to produce data to support the theory that demonetisation had damaged the economy even temporarily, much less permanently.

 

The critics, of course, didn’t have this data, because nobody had it. The formal sector was not hurt at first and GDP estimates based on numbers it was putting out were more or less in line with what they would have been without demonetisation. The first signal that something was dramatically wrong was in imports. The goods India was importing from others shot up after demonetisation. The reason was that those firms that were previously supplying these goods locally were damaged or shut due to demonetisation, making India dependent on foreign goods.

This would also mean that consumption in India would suffer because companies shutting down would lead to a loss of employment. Again, this is not an area where the government has any good data. It does household surveys, but these also have been endangered by the mess over the National Citizenship Register. It is unlikely that in the near term we will have good official data on unemployment from the government. It is the private sector, particularly one company, Centre for Monitoring of the Indian Economy, with hundreds of field agents and its real-time data that offers the most credible numbers on unemployment in India.

 

CMIE showed that indeed unemployment was rising in India, and by the time of the 2019 election it reached historic levels never before recorded. The third sign of the damage came in formal GDP numbers as well. As businesses were wiped out and people were unemployed, consumption suffered. This began to reflect before long even in the high frequency and other data.

India’s GDP growth as measured by the government through the formal sector began to slip and fell every quarter between January 2018 and January 2020. Why? Because demonetisation had weakened it in ways that are structural.
This time, there are three things which are different. First, the economic shock is more severe than it was in demonetisation. Second, this will be longer lasting, not only because the disruption is vast and because it is global, but also it will take time to rebuild trust. Third, the data will be clear from the start. The formal sector, shut down fully in April and limping along from May, will report results that will show a contraction of the economy. Two consecutive quarters of negative growth are the technical definition of an economic recession, and for the first time in this generation’s memory, we may be staring at one.

 

Tags: economic recession, global recession