As the Coronavirus pandemic ravaged the entire planet, most countries went into various levels of lockdown that substantially damaged their economies. Consequently, headline economic indicators of all nations, except China, nosedived in the first quarter of FY 2020-21. One of the worst affected was the Indian economy, which declined by 23.9 per cent. The stimulus of Rs 20 lakh crore, announced in June 2020, proved ineffectual in reviving the economy in the short term; rather we faced migrant workers’ exodus, huge job losses, and sundry other crises during the first two quarters of FY 2020- 21. The RBI declared that we were in the throes of a ‘technical’ recession, which did not make the recession any less real.
The economy saw a small recovery in Q3 of FY 2020-21, which was strengthening during Q4; however, onset of the second wave of Covid, limited the recovery. Overall, the Indian economy contracted by 7.3 per cent in FY 2020-21. Encouragingly, despite the havoc wrought by the second wave of the pandemic, our GDP increased by 20.1 per cent in Q1 of FY 2021-22, prompting a barrage of superlatives from Government spokesmen. Everyone seemingly lost sight of the fact that the increase in GDP was measured relative to the incredibly low level of GDP of Q1 of FY 2020-21, and in absolute terms,
our GDP had not even attained the level of FY 2018-19.
Economic indicators of Q2 of FY 2021-22 have not been published so far, but RBI’s October 2021 Bulletin forecasts a GDP growth of 9.6 per cent during the quarter. If this trend holds, our economy would achieve FY 2019- 20 levels by the end of FY 2021- 22. However, different sectors of the economy have recovered differently. Some sectors, led by the share market, are surging forward; the manufacturing sector regained pre-Covid levels by the end of July 2021, income-tax collections for the first half of FY 2021-22 were 14.6 per cent higher than the collection of H1 of FY 2019-20 and GST collections are at an all-time high.
But, on the other hand, the number of people seeking employment under MGNREGA has risen alarmingly, exhausting the entire budget for MGNREGA in 21 States and forcing the Centre to run a negative balance of Rs 8,686 crore ~ even after work could not be provided to 13 per cent households. Unemployment and roaring inflation during the lockdown had worsened the plight of the poor in India. Most daily labourers had no work, migrant labour had returned to their villages, and pensioners’ meagre incomes shrank due to low interest rates.
A study by Centre for Sustainable Employment at Azim Premji University, titled “State of Working India 2021 ~ One year of Covid,” found that 23 crore Indians were pushed back into poverty during the pandemic year, with a 15 per cent increase in the poverty rate in rural areas, and a 20 per cent increase in urban areas. The situation has not improved much; total employment fell in October 2021, with unemployment reaching 7.7 per cent. Disturbingly, the number of salaried persons, business persons, small traders and daily wage labourers, all have declined, while the number of farmers has increased by about 10 per cent. This shows that the Indian economy is treading a contrary path, because classical economic theories posit that as countries develop, people steadily move from the primary sector (agriculture) to the secondary sector (manufacturing) and then to the tertiary (services) sector.
Paradoxically, the earnings of the uber rich have grown exponentially; India added 55 billionaires in 2020, and overall, India’s billionaires increased their combined wealth by 50 per cent. The two richest persons in Asia now are Mukesh Ambani and Gautam Adani, with the former breaking into the US$100 billion club. But many small businesses are in distress. According to Confederation of Indian Industry (CII) data India has about 63.4 million MSMEs, producing 33.4 per cent of manufacturing output, and employing about 120 million workers.
A survey by All India Manufacturers’ Organisation found that more than a third of MSMEs and self-employed individuals had to shut shop after the first lockdown. Post-pandemic recovery was impeded by soaring commodity costs and lack of demand. According to RBI statistics for September 2021, the share of loans to industry dropped from 27 to 26 per cent in one year, and the share of personal loans went up to 27 per cent – more than industrial credit for the first time, pointing to stagnation in the MSME sector.
It would appear that the MSME sector could not benefit from the Government’s various schemes to provide credit. Some economists had postulated a U-shaped economic recovery after the pandemic meaning that the world economy would be in doldrums for some time, some had predicted a Wshaped recovery, where the economy would tread a yo-yo path or a K-shaped recovery, which would see some sectors surge ahead while the rest would head south. However, our Chief Economic Advisor was more sanguine for India, predicting a V-shaped recovery, that is after touching bottom, the economy would take off like a rocket.
As the difference between the haves and havenots increases by the day, it appears that our economy had a K-shaped recovery. One key reason for the uneven growth of the economy is the Government’s obsession with figures. Initiatives like Production Linked Initiative can improve headline statistics quickly while investment in the social sector takes time to show results.
Another reason is the Government’s misplaced belief that big business would lead us out of the woods. Even though hi-tech factories of today employ far fewer people, the Government launched signature schemes like Atmanirbhar Bharat and Production Linked Incentive (PLI) to boost the manufacturing sector and push up employment. Budget 2019, and post-budget announcements provided relief of Rs 2 lakh crore to the business sector through tax cuts and other measures.
Later on, around 80 per cent of the stimulus of Rs 25 lakh odd crore, announced by the FM between April and November 2020, was aimed at MSMEs and corporates. Despite all incentives offered to the manufacturing sector, the share of manufacturing in GDP has remained stagnant at 17 per cent for the last 5 years, and employment in the manufacturing sector has declined sharply from 5.1 crore persons in 2016-17, to 2.73 crore persons in 2020-21.
On the other hand, with a comparable share in the GDP, the agricultural sector employed 14.56 crore people in 2016-17 which increased to 15.18 crore persons in 2020-21, that is 40 per cent of the total workforce was employed in agriculture in 2020- 21, up from 36 per cent in 2016- 17. Yet, out of an allocation of Rs 3.34 lakh crore in Budget 2019 for agriculture and allied activities, only Rs 2.35 lakh crore was spent.
The cash component of the stimulus for farmers, Rs 50,000 crore, covered only half of the Budgetary shortfall of Rs 99,000 crore. Still, the agricultural sector was the only sector of the economy that withstood the vagaries of the Coronavirus scourge, growing by 3.4 per cent in FY 2020-21. Demand for tractors, agricultural implements, fertilisers etc. kept the cash registers of many manufacturing concerns ringing. At the time when overall exports declined by 7.2 per cent, exports of agricultural commodities rose by 22.62 per cent, to Rs 3.05 lakh crore, in FY 2020-21.
Politics overtaking economics and the politicians’ lack of confidence in the capabilities of its economists and government functionaries has always stymied Government decision making, a prime example of which is our skewed taxation structure which relies more on indirect taxes than direct taxes (discussed in detail in Taxation Challenges published in these columns on 22 October).
For example, extortionate levies on petroleum products were reduced post electoral reverses, after ignoring the advice of all and sundry, including the RBI Governor, to reduce the economically harmful taxes. Probably, ease of collection of indirect taxes has blinded the Government to all other considerations, including the capability of taxmen to collect taxes on income.
In conclusion, a rethink of our economic strategy is required. We should think small rather than big; the focus should be on incentivising employment intensive small businesses which would benefit a larger number of people rather than promoting large-size automated, modern manufacturing facilities. With technical guidance and adequate capital, our vast army of unemployed engineers can set up small, specialised technical units which could provide gainful employment to many.
Agriculture-based, export-oriented industries dovetailing with the farm sector would give a boost to both employment and agriculture. Indeed, if sufficient money and sincere efforts are put in by the Government, and a proper solution is found to the controversial Farming Acts, agriculture and small businesses could rejuvenate the economy.
(The writer is a retired Principal Chief Commissioner of Income-Tax)