India’s Economic, Financial and Social Performance during 2020

India’s Economic, Financial and Social Performance during 2020

Rohit Kumar Parmar Free lance [1]

IES (Retd)

Former Senior Economic Adviser

Ministry of Consumer Affairs, Food and Public Distribution

As the journey of 2020 comes to a close, a review of India’s performance in select Economic, Financial and Social spheres would help to make an assessment and suggest steps for reviving growth and post COVID recovery in 2021. In the present analysis, to the extent possible, data available from government sources is used. The only reason for this is to avoid adding another dimension to the debate. An attempt is also made to avoid non analytical inferences or to attribute them to any individual or grouping, in any form.

Macro Performance of the Indian Economy

Two macro indicators are adopted for the assessment – Gross Domestic Product (GDP) and Inflation (Consumer and Wholesale Prices, including divergence between the two).

Gross Domestic Product

Before the onset of the COVID crisis, the rate of growth of Gross Domestic Product (GDP) declined by 64 per cent from a high of 8.2 per cent in 2016-17 to 5.0 per cent in 2019-20. The Annual performance of GDP since 2016-17 is summarised in Table 1. This decline apart from adversely impacting growth of per capita income would have impacted employment in terms of absolute numbers and the type of employment, which would have shifted from regular/ formal to contract/ informal/ job work, etc. It would also have reduced the ability of households and government to spend on social services and amenities.

The downtrend in GDP continued during the COVID year of 2020, when the rate of growth in GDP is estimated to decline by (-) 10.3 per cent. The Pre-COVID reduction in growth rate of GDP needs revival and the post-COVID decline requires recovery. The stress in the economy during the 2016-20 period on per capita income, employment, ability to spend on social service and amenities would have sharply increased in the post COVID period.

The Monthly Economic Review, November 2020 [2] in Table 2 (reproduced below), suggests that the decline in India’s GDP and so impact would be one of the highest globally. The projected decline of (-) 10.3 per cent is 2.3 times that of the decline in the World Economy of (-) 4.4 per cent. The rather preliminary natured estimate of positive and higher growth rate during 2021 (i.e., FY 2021-22) may not be adequate to wipe out the reduction in the Economy during 2020-21. The impact of this is likely to be more on the informal sector.

It is important to distinguish the pre and post COVID changes in GDP, because the reasons are different, and the remedy will also be different. The Indian economy needs two recoveries, first to offset the pre-COVID decline in the growth rate of GDP and the second for the post-COVID decline, when GDP recorded an absolute decline, one of the highest in the world.

The argument of a `V’ shaped recovery is presumably limited only to the post COVID decline in the GDP, and suggests that during 2021-22, the level of GDP in the pre 2020-21 may be reached. Table 2 suggests that the economy as measured by the GDP would in 2021-22 be around 2.4 per cent lower than in 2020-21, if the estimate is achieved. This is also borne out by the Chart 1 below (extracted from the Monthly Economic Review November 2020). The unrealised residue portion of the upward movement in the `V’ is added in a differently coloured line in the Chart below. The social implications of the slowdown pre COVID growth in GDP and the post COVID deceleration in GDP are discussed in the latter sections. There are similar and stronger implications for the informal sector.

While the estimates of post COVID recovery need to be closely scrutinised, there is a need to track and monitor the recovery, especially for the informal sector. While the `V’ shaped recovery would depend on the performance of several sectors, the quarterly data plot (also extracted from the Monthly Economic Review November 2020) does not support the proposition of recovery from the decline in the growth rate of GDP from 2016-17. This recovery is essential for increasing growth, employment, addressing poverty, maintaining social sector spending and revival of the informal sector. While there could be disagreement on whether poverty ratios have increased, surely the decline in poverty ratios is at a standstill or has considerably slowed down.

Inflation

From low and negative inflation rates (measured in terms of wholesale prices) recorded during 2015-18, resulting from a sharp fall in global oil and some commodity prices, which made the computation of GDP numbers a statistical jugglery and so suspect, especially when the new GDP series was to be launched, India has since 2018 been recording very high rates of inflation, especially Food inflation. (Table 3 and Chart 3)

The high rates of inflation are the outcome of apportioning by the government (Centre through an increase in duties and the States because of ad-valorem effect and increase in state taxes and levies), instead of passing the entire fall in global oil prices to the consumer, [3] making the Indian economy a high cost and less competitive one. [4]

The increase in oil prices would have severely impacted sections of the lower and middle income group, who cannot book these expenses under some tax saving head like the formal and corporate sector, nor can pass on the same as higher price. In other deregulated economies, the pass over of the fall in global oil prices is complete.

There are dimensions of inflation that cause additional concern. (Table 3) First, is the higher inflation at the retail level than at the wholesale level. An interpretation of this `that not only are prices at the retail level higher, when compared to the wholesale level, they also increase at higher rates.’ This inter-alia suggests greater imperfection in the retail markets and the need to enhance competition by removing controls and barriers to entry, especially at the retail level.

The Second concern is the higher inflation rate in food articles, compared to the overall consumer prices (as captured by the CPI). In fact, food inflation during 2019-20 is more than 13 percentage points higher than wholesale inflation. The household burdened with lower increases in (per capita) incomes, reduced and/or inferior employment, inadequate resources for social sector spending, is additionally burdened with higher food inflation.

Financial Sector

The financial sector especially the banking sector is marred with a plethora of problems - declared NPAs which require provisioning at the cost of the depositor or the tax payer; undeclared NPAs waiting for ability of the commercial banks to provision and then be declared as NPAs; large spread between average borrowing and lending rates, reducing returns to depositors and increasing cost of credit; absence of prudent banking resulting in the erosion of the net worth of several banks, requiring a government bail out by merger or stepping in by the RBI; large unbanked areas of the population in terms of spread and products; government efforts to spread banking through no-frill accounts, creating additional demand on the banking infrastructure, subjecting it to avoidable stress and problems to the unwilling beneficiaries; inability of the banking system to recover large outstanding loans from the key borrowers; inability of the Insolvency Bankruptcy Code, 2016 to start settling bank dues even after four years; Mumbai or Urban centric approach to providing banking services.

To the above, have been added the problems on account of COVID including the need to restructure the repayment of the outstanding loans with no clarity on who would pick up the tab. The government because of limitations of resources is unwilling/ unable to pick up the additional costs (interest) of the restructured loans and the banking sector is unable to do so because it shall further erode their net worth. A mid-way path through debate needs to be considered.

A large part of the finance for the informal sector and the individual comes from the unorganised money market- the moneylender/ Sahukar/ Mahajan, etc. In the post COVID period, this market would have thrived because of complete cash seizure during the lockdown, widespread closure of economic activity and jobs. The loss of formal jobs would have made credit availability from the formal banking system impossible. The volumes and cost of interest in the informal sector would have gone up and the issue needs to suitably form part of the questionnaire in the next socio-economic survey. In this background some financial sector indicators including Money Supply and Credit Growth are analysed. (Table 4)

The Growth of Money Supply (M3) an indicator of liquidity, finance and credit to the economy, decreased from 10.6 per cent in 2018-19 to 8.8 per cent 2019-20. This is an indicator of reduced liquidity and associated stress. Growth of currency holding decreased from 16.8 per cent in 2018-19 to 14.0 per cent 2019-20 but continues to be high despite efforts to shift to digital forms of payment. Growth of demand deposits decreased from 9.6. per cent in 2018-19 to 6.8 per cent 2019-20, reflecting the inability of the population to save money in the form of bank deposits and/ or the availability of higher return paying options. The growth of deposits further decreased during the current financial year by (-) 7.0 per cent. This is strong evidence of sections of the population drawing into their past savings.

Social Sector Performance

The deceleration in the growth rate of GDP by 64 per cent from a high of 8.2 per cent in 2016-17 to 5.0 per cent in 2019-20, would have adversely impacted capita income, employment, ability to spend on social amenities and so the reduction in the rate of poverty reduction and social sector performance. The recently released HDI Report (http://hdr.undp.org/sites/default/files/hdr2020.pdf) reports a slipping in India’s ranking from 129 in 2018 to 131 in 2019. (https://www.thehindu.com/news/national/india-ranks-131-in-2020-un-human-development-index/article33348091.ece) The findings of the HDR are in line with the reduction in per capita income and job losses. This deceleration followed by the onset of COVID, impact on daily earners/ micro and small business/ business, due to the lockdown and closure of economic activity, would also have further adversely impacted poverty reduction and social sector performance.

Social sector performance outside the normal growth process is marred by a plethora of schemes, not necessarily in synchronization with each other and/or across states. The introduction of Aadhar card should have ensured the closure of all other individual cards for each publicly funded social or economic activity, to ensure neutrality, efficiency in delivery and portability in all forms across states, schemes, administering agencies/ tiers and beneficiaries. The introduction of additional vectors/ data sets would have ensured saving in the administrative, time, harassment and cost of creating a new data base for each activity/ state/ administering agency. However, the expanding administrative locust feels that a data base under its control is the only way to administer it, without reference to any parameter of efficiency.

To illustrate, the `One Nation One Card’ scheme has over the last year been implemented in 9 States only. [5] The time taken in the roll out is because each state has a separate design of the data base, portal and format for beneficiaries and the vertical providing it. In addition, the physical application form and card, format of reporting, is different for each state, all of which have been paid for by the union government scheme (albeit state share of funding) of NFSA/ BPL, out of the taxpayer’s money.

If the data base and the backbone was the same for the entire NFSA/ BPL scheme, the `One Nation One Card’ scheme would have been extended at the proverbial `click of a mouse.’ Such a data base and backbone could provide for any state variations in place of individual databases. Such an option would have been beneficial to migrant labourer, who did not get their BPL or free COVID rations, which provision was linked to the ration cards issued in their home state.

National Family Health Survey

The first set of findings of the 5th National Family Health Survey (NFHS 5) data (the most comprehensive data on health and family welfare and emerging issues in this area) for 17 States and 5 Union Territories, conducted in 2019-20, after four years (2015-16), released by the Ministry of Health and Family Welfare, suggests worsening of conditions of women in parameters in some states. As stated earlier, these are findings from the first phase of the NFHS-5. Some of the worrying highlights follow.

The NFHS-5 indicates a decline in nutritional status of children under 5 years, continued female sterilisation being dominant as the modern method of contraceptives, anaemia being much higher among women compared to men and increase in teenage pregnancies.

The decline in the nutritional status among children under 5 suggests the need to appraise and evaluate the Rashtriya Poshan Abhiyan and the Poshan Maah campaign, for its delivery. The decline in the nutritional status among children under 5 during 2019-20 is likely to be further aggravated after the onset of COVID, due to the lockdown which resulted in the closure of the Aanganwadis.

States like Manipur, Andhra Pradesh, Himachal Pradesh and Nagaland had also shown an increase in teenage pregnancies. Along with an increase in child marriage, Tripura has also shown an increase in teenage pregnancy from 18.8% in 2015-16 to 21.9%.

Sexual violence has increased in five States (Assam, Karnataka, Maharashtra, Meghalaya and West Bengal).

There is an increase in the average out of pocket expenditure (OoPE) per delivery in public health facilities in the states of Sikkim (109%), Mizoram (63%), Bihar (60%), Assam (42%) and Manipur (40%). The high share in the OoPE per delivery is reflective of factors including poor rollout and low reliability of public health services, especially in these states, four of which are in the North-East.

Government needs to improve the availability of health services to a larger share of the population, since their ability to spend has sharply decreased because of lower per capita income, lesser or inferior employment, higher food inflation and lower ability to spend on social services. This reduction in ability is combined with the increased need to spend on health service due to the COVID pandemic.

Conclusion

To sum up, the decline in the rate of growth of Gross Domestic Product (GDP) by 64 per cent from a high of 8.2 per cent in 2016-17 to 5.0 per cent in 2019-20, which downtrend continued during the COVID year of 2020, when the rate of growth in GDP is estimated to decline by (-) 10.3 per cent, has lowered per capita income, reduced employment, has higher food inflation and lower ability to spend on social/ health services.

The high rates of inflation India since 2018, wid gap between wholesale and retail inflation, very high food inflation create stress and needs to be addressed. While government (Central and State) may consider reducing duties/ taxes/ levies on POL, it should also take cognizance of the fact that there is greater imperfection in the retail markets and the same needs to addressed by enhancing competition and by removing controls and barriers to entry.

Government and the commercial banks need to dialogue on how to share the burden of interest cost due to restructuring of loans. The method of sharing the same should be transparent and start with inviting suggestions on the same. Monetary parameters suggest a continued reduction in money supply, accompanied with increase in cash holdings and a decline in deposits.

Among the several measures aimed at improving the social sector scheme, an integrated data base would help increase efficiency and portability. An integrated data base would have helped the migrant labour to receive rations under the BPL/ Free rations in the COVID type of crisis.

Women issues especially nutritional status of under 5 needs to be addressed by improving the delivery of the programme.

[1] Author has in posts on his website (https://rohitkparmar.wixsite.com/site), twitter (https://twitter.com/rohitkparmar?s=09), facebook (https://www.facebook.com/me/), linkedin (https://www.linkedin.com/in/rohit-kumar-parmar-841b4724) been writing on impact of Covid and can be reached at rohitkparmar@yahoo.com. [2] Source: Ministry of Finance, Department of Economic Affairs, Economic Division. https://dea.gov.in/monthly-economic-report-table [3] See other posts in the social media on this theme https://m.facebook.com/story.php?story_fbid=2636742796449136&id=100003403253504 https://m.facebook.com/story.php?story_fbid=2678226612300754&id=100003403253504 https://m.facebook.com/story.php?story_fbid=2719878878135527&id=100003403253504 [4] Also see editorial in a lead daily https://www.editorialwords.com/the-hindu-editorial-mild-moderation-dec-16-2020/ [5] https://www.thehindubusinessline.com/news/nine-states-achieved-one-reform-parameter-to-be-eligible-for-additional-borrowing/article33291014.ece