By Rupa Subramanya
The nationwide lockdown imposed by prime minister Narendra Modi on March 24, the most total and complete of any in the world, and which was further extended until May 3, is set to expire in a few days. However, reports suggest that it may be extended till May 15, with no relief for containment zones.
While the benefits of the lockdown in terms of containing the spread of Covid-19 are not at all clear, the costs are becoming increasingly and glaringly apparent.
There is no way to precisely measure the cost to the economy, but one widely citied study by Nomura, a Japanese investment bank, suggests that up to 75% of economic activity has been frozen due to the lockdown. So far, however, we have not had a credible numerical estimate of the damage to GDP. We have that now.
On April 13, Amitabh Kant, CEO of Niti Aayog, made a presentation to members of the Confederation of Indian Industry (CII) on alternative economic scenarios and policy recommendations coming out of the Covid-19 crisis and the subsequent economic lockdown. The event was not reported widely in the Indian press, and the presentation itself has not been placed in the public domain, although it has been privately circulated, and I have seen a copy. There is a report in this newspaper (bit.ly/2zHKioJ) which shares some information.
Niti’s projections are based on an underlying model that has not been explained, so necessary caveats apply. The presentation lays out three scenarios corresponding to the lightest to the most severe lockdown. The baseline scenario, Scenario 2, assumes that the lockdown will continue till mid-May, with a moderate relaxation after mid-April, and further assumes that the restarting of supply chains and normalisation of production and consumption would take three to four months. This seems to be the closest to the situation we find ourselves in at present.
According to Niti’s Scenario 2, the expectation is of a 2-3% contraction in real GDP year-on-year from FY20 to FY21. The model projects a sharp contraction in Q1FY21, the quarter we are now in, with a gradual recovery over the remaining three quarters, but with a net loss of real GDP, as noted, of 2-3%. Contrast this very plausible scenario with the International Monetary Fund’s projection of 1.9% growth in India’s real GDP during the current fiscal year.
The 2-3% predicted drop in real GDP corresponds, according to Niti’s estimations, to job losses totalling 38 million workers and a sharp worsening of the non-performing assets (NPA) crisis in the banking and non-bank financial (NBFC) sectors. In particular, Niti expects that incremental NPAs under Scenario 2 will increase by 8.1% compared to the status quo.
The news gets worse.
Even the 2-3% drop in real GDP, which is bad enough, masks very damaging sectoral impacts. Niti analyses output compression in Q1FY21 versus Q4 FY20 in 14 key sectors that together account for approximately 70% of GDP. According to this analysis, the hardest hit sectors are airlines and hotels, with a dramatic 60-80% loss in output between the last quarter of the last fiscal year and the present quarter of the present fiscal year. The next hardest hit would be the automobile and advanced industries (AI), and construction sectors, with output losses of 50-70% and 50-60%, respectively. Other big losers are textiles, freights and logistics, and oil and gas, all of which contract upwards of 40% of output. Metals and mining would contract 35-40% while power, and consumer and retail would contract 20-25%. Chemicals is expected to contract 15-20%, while IT services would contract 10-15%. The least affected of these major sectors are pharmaceuticals, telecom, and agriculture, which are all expected to contract less than 10%.
Focusing on these key sectors and projecting out over the full fiscal year, the economic impacts are still very substantial. For example, over the full fiscal year, airlines and hotels are expected to contract a whopping 30-35%. Meanwhile, auto and AI, construction and real estate, textiles, and freight and logistics all contract 10-15%. The full year impacts on other key sectors are more attenuated, with consumer and retail, and telecom actually expected to grow 5-10%.
However, the headline projection of a 2-3% drop in real GDP should be startling. This is to say nothing of the most dire scenario, Scenario 3, essentially one involving a highly extended lockdown due to “virus resurgence”, which predicts a catastrophic drop in real GDP of 8-10% in one fiscal year.
The last time that real GDP in India contracted (in other words, real GDP growth turned negative) was the crisis year of 1979, when India and the world was hit by a major oil shock, and the then ruling Janata government was on the verge of collapse. It is astonishing that even during the 1991 macroeconomic crisis, which ushered in the era of economic reforms, the Indian economy actually eked out a positive growth rate of approximately 1%.
Despite the government’s unverifiable claims of “flattening the curve”, there has been provable economic harm. What is disturbing is that the government has not presented to the Indian public any kind of cost-benefit analysis, coming clean on the trade offs involved between a protracted lockdown and the lives that may be saved versus the worsening damage to the economy and livelihoods and the attendant human, social and, economic costs.
In advanced economies, there are now concrete plans of lifting lockdowns selectively and safely. It is extraordinary that in India, by contrast, state chief ministers have been the most vocal advocates on longer and more stringent lockdowns, even as they claim the spread of the virus is under control.
Unfortunately, the reality of the damage being done does not seem to be filtering up to those in charge. According to news reports, the PM, in a meeting with state chief ministers on April 27, assured them that “the country’s economy is in good shape and there is no need to worry”. This is astonishing, given that, in the presentation (dated April 13) that I cite, Niti, which the PM chairs, came up with the dire projections we have just discussed.
By Niti’s taxonomy, we are firmly in Scenario 2 and, perhaps, heading dangerously towards Scenario 3, where GDP crashes by 8-10%. This would be catastrophic beyond belief, and would be a major setback to India’s development aspirations, which will take years to recover, with much of the gains of poverty alleviation of the last few decades being undone.
The author is Economist, independent researcher & commentator. Twitter: @rupasubramanya. Views are personal