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Moneycontrol
Last Updated : Sep 01, 2020 05:15 PM IST | Source: Moneycontrol.com

Exclusive | Q1 GDP data doesn't capture full extent of damage to economy, says Pronab Sen

The GDP data for the April-June quarter of 2020 showed that the Indian economy contracted 23.9 percent year-on-year due to the lockdowns imposed in March to contain the spread of the COVID-19 pandemic.

Representative Image
Representative Image

The GDP data for the April-June quarter of 2020 showed that the Indian economy contracted 23.9 percent year-on-year due to the lockdowns imposed in March to contain the spread of the COVID-19 pandemic.

"The Ministry of Corporate Affairs data would come which would have all registered companies, including the unlisted. That's where I suspect the damage would really come out because that data would include the smaller companies that I think have been worse affected than the larger ones that are currently included in the sample. And then after that comes the informal sector," Pronab Sen, former chief statistician of India, said in an exclusive interview to Moneycontrol.

Sen said the Q1 GDP data doesn't capture the whole extent of the damage that the lockdown did to the economy. He said that this data sample includes data from only the larger companies that were affected due to the lockdown and not the unlisted and smaller companies.

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Edited excerpts:

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To what extent does Q1 GDP data reflect the damage to the Indian economy?

Well, this is only the first step because what the QI data reflects is essentially the effect of the lockdown. It doesn't really give us an indication of what the dynamics would be going forward. That will come later. The lockdown effects will persist a little longer because we have these localised lockdowns happening. So the data is going to be in a sense affected by that. But when you have damage of this magnitude because of the lockdown, it takes time for it to play out through the economy. Those effects would be starting now and go on possibly for a year, year-and-a-half. So this is only an indication of the initial shock that the economy has faced.

You have maintained that the GDP data does not capture informal sector and some parts of the formal sector as well, properly. Due to the lockdown, data collection also was a problem for inputs. So should we expect a downward revision of the Q1 GDP numbers when Q2 data comes out?

It's not just the informal sector. Other than agriculture, there is no data whatsoever in the informal sector. However, that's only a part of the story. First, the first quarterly estimate is largely based on corporate data. Even in that, it is limited to listed companies, those which have to submit quarterly reports to the Securities Exchange Board of India (SEBI). Second, as far as the companies are concerned, because of the lockdown, SEBI had extended the time within which the returns have to be filed. So, a lot of the companies have filed the returns yet. When those come in, then the estimate would have to be revised again. Because you'd then have all the listed companies' data available as against the partial data they have at the moment. Third, like I said, this is only listed companies. Then the Ministry of Corporate Affairs data would come which would have all registered companies, including the unlisted. That's where I suspect the damage would really come out because that data would include the smaller companies that I think have been worse affected than the larger ones that are currently included in the sample. And after that comes the informal sector.

A post-GDP report by CARE Ratings shows that India's April-June quarter economic performance was one of the worst among other big economies. What makes India's performance so poor in comparison?

The confusion lies in thinking about it in terms of the normal dynamics of an economic slowdown. We know that the lockdown in India was more severe than in most other countries. What this data is saying is that the lockdown was effective; that economic activities came to a grinding halt. It is really a reflection of the success of the lockdown, that people obeyed the lockdown. There should be no confusion that if we had the most severe lockdown in the world, we should expect the economic damage arising out of it to be also one of the worst in the world.

Except for agriculture, the employment-heavy sectors like manufacturing, construction, real estate and hospitality were all badly hit. Where does the government's narrative of green shoots go from here? Also, by when do you see India return to their pre-outbreak levels?

Revival should not surprise anybody because once you have lifted the national lockdown, then units which have not died will come back into production. And that is happening. It gets a little complicated with the localised lockdowns but by and large, activities have restarted. Now whether they will go back to the levels they had last year really depends upon two things. One, how many production units have died, because by now, particularly among the smaller units who have very little staying power, a fair number would have collapsed. Second is what happens to demand. Will demand reach last year's levels? And if you have got a 24 percent negative growth in the first quarter, then incomes available to people have gone down. If that has happened, then you should not expect demand to go back to that level. Now how long that while is, is the question.

Do you think once the storm is behind us, it will set the stage for deeper and more accelerated economic reforms?

It depends on what the objectives of the economic reforms are. A lot of these reforms can be done anyway, whether or not this whole COVID business happened. It hasn't been that, hasn't been done in six years, hasn't been done in 20. A lot of them have been on the table for decades and has not happened. But these economic reforms as response to COVID need to be seen in the context of whether they would revive investment or not. And the short answer is that investments will not revive unless investors see demand. Once investors come back, then these reforms will help things along. But just because you are doing the reforms, investors won't be putting money in ventures if they are not confident of being able to sell their output once it comes into production.

Do you think it is time for Finance Minister Nirmala Sitharaman to press the reset button and present Budget 2020 2.0 as almost every component in the annual accounting exercise, and every element of assumption and projection now require a second look?

Yes, they should because a budget is ultimately about the fiscal response happening to the economy. Now when the economy has got a jolt of this magnitude, your original calculations become invalid. Because those were based on a particular expectation of how the economy would be in the coming year. All of those calculations have gone out of the window and should go out of the window. Now, if that is the case, then you have to revisit the budget. So then you have to have a take on what you expect the economy to be doing and therefore what the government needs to do to improve things.

The Rs 20.97 lakh crore economic revival package that the government had announced in May is a mix of structural reforms, fiscal support and loan guarantees. Critics, however, say the package ignored the plight of millions of internal migrants. What’s your view?

As far as the internal migrants are concerned, the initial step that was taken, which is prior to the Atmanirbhar package, it was the Garib Kalyan Yojna, that was actually towards the migrant labour. So the transfers into the Jan Dhan accounts, the free rations, were supposed to take care of that problem. The issue there is, was it enough? The simple answer is no, it wasn't. Firstly, the government really has no way of identifying and reaching out to the migrants. So what they have to do is more of a blanket coverage. So you are spreading your resources thin, so to think about it, you are giving Rs 500 per month. To a person who has lost his job, that amount doesn't even cover one person's survival for a month, forget about the family. So, the amount was very small. Subsequent to that, all that has been done is to extend the period over which the free rations would be given. And that's about it.

The government has given money to small enterprises (MSMEs) through loans to restart operations. But when there is hardly any demand for their products because of the lockdown effect, what, why and for whom shall they produce? The economic revival package skirts the demand-side problem significantly. Isn’t it?

Completely. There is very little to support demand. And more importantly, there is very little to give people the confidence that within a reasonable period of time, demand will return because the government is going to be supportive. Even that indication we don't have. So the problem continues. You are getting into a chicken-and-egg problem. Producers are not going to open up production until they see demand, or at least an assurance of demand. And if producers don't start, income streams don't happen. Employment doesn't happen, wage earnings don't happen and therefore demand doesn't start. It's a classic chicken-and-egg problem.

Is there, then, a need to speed up fiscal intervention?

Yes, there is. As the lockdown weakens, that is when the fiscal intervention has to happen and it should happen relatively early. But even more important than that is for the government to give an assurance that the demand support would stay for some time and not be pulled abruptly. It should not be a one-time package. We should be looking at at least a one-year time horizon over which fiscal support would exist.

Targeted financial support versus universal open-ended support: which one will you vote for and why?

As far as the demand side is concerned, it is very difficult to do targeted support. Britain has done things like subsidising eating out at restaurants. That is a demand side support. But those are relatively limited. And much more importantly you have no real way of reaching out to the MSMEs. The corporates, yes you still can. But the MSMEs no. For the MSMEs what is important is generic, general, economy-wide demand support. So in a sense it is much more macro rather than sectoral reforms and I think the concern should be really the MSMEs.
First Published on Sep 1, 2020 04:29 pm
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