India is unlikely to regain the loss of economic productivity given the extent of damage borne by the economy due to the COVID-19 pandemic DK Joshi, Chief Economist at CRISIL believes that the already slowing Indian economy was further impacted due to the strict lockdown imposed by the government to tackle the COVID-19 pandemic.
The Indian economy has contracted by 23.9% in the first quarter of financial year 2020, the country's first ever economic decline in more than 40 years. Barring agriculture and farming, all sectors of the economy declined construction, trade hotels and transport and manufacturing hit the hardest. While countries like the US, the UK, Germany, Japan and France have also seen their economies being dealt a blow, India's contraction is among the worst in the world.
Speaking to BOOM's Govindraj Ethiraj, DK Joshi said that there are several reasons for India's economy to be among the worst-hit. One of the major causes was the lockdown imposed by the government at the end of March. Joshi says that the stringent lockdown all but halted economic activities in the country which further damaged the economy.
"You entered the crisis with, if I were to use that term, weak immunity so to say. The financial sector was in a clean-up process, the GDP growth was slowing down and within that, investments were already negative. And in the last quarter, private consumption was also weak and exports were also shrinking. What the crisis did was, it magnified all those problems. So if you entered with a slightly stronger wicket, I think the hit would not be that much. Now, the only way to offset this is to give a huge amount of stimulus, which I think India's stimulus is a little lower than other economies," Joshi added.
Joshi believes that even though streamlining existing reforms and implementing new ones will revive the economy, some of the lost GDP is unlikely to be recovered.
"Even if you grow at 7% per annum for the next three to four years, I think this permanent loss will stay. You need to grow more than 11% to recover this loss. So some part of the GDP is lost.
"Reforms pay off with the lag. So I think if the government focuses on streamlining them (IBC and GST), then I think whenever the recovery starts, that will contribute positively to efficiency. These are the measures which will help you over the long run. In the short run, you still need to spend more so that the bridge between the crisis and the recovery is strong enough to carry the businesses and the individuals to the other side," Joshi said.
The full transcript of the interview can be read below.
Govindraj Ethiraj: Hello and welcome. India's GDP or Gross Domestic Product has fallen 23.9%, or almost 24% for the three months ended June, in contrast to the same period last year. Now, this is obviously a significant fall. But it's also to be seen in the context of the lockdown that India had imposed starting the third week of March. Now, the question of course, is that what does this mean? What does such a dramatic fall in GDP mean? And to what extent should we be interpreting this as a sign of problems present and future. To discuss this, I'm joined by DK Joshi, Chief Economist of CRISIL. Mr. Joshi, thank you so much for joining us.
Two points that you've made in the past or rather one point you have said in the past that successive lockdowns will have a nonlinear and multiplicative effect on the economy. A two month lockdown, and this is very interesting, is more than twice as debilitating as a one month lockdown as the buffers keep eroding. So now we are, of course at perhaps the fifth and going into the sixth month of a lockdown. So, I really wonder what this impact could be. The second point, of course, is the numbers that CRISIL has been putting out and CRISIL had forecasted permanent loss to GDP of about 10% earlier, and it had also said that for this quarter, there would be a 25% contraction. So to that extent, I think your numbers are somewhat in line. Let's come back to the question. So, what does this 24% mean?
DK Joshi: Well, I think this is in essence telling you that a quarter of the economic activity has been lost. 25% for the first quarter. Now it means different things for different people. Depending on whether you are in the agriculture profession or industrial profession, or services, you will be impacted differently. For instance, let's take the case of agriculture, we all know is doing reasonably well. But if you compare industry and services, now the initial hit to the industry has been more than the services, but the resilience of industry is much more because it will rebound quickly. Services will suffer from face to face related issues. So, parts of the services like for instance, wherever I think whether it is entertainment or it is your sports or it is a tourism. So, these will not return back to normal. The manufacturing can still return back to normal.
So, I think the services related activities, parts of it will continue to have a longer slow down impact then manufacturing. So I think at the other level what does it actually mean? So what we are seeing in data is that, well, consumption, private consumption has gone down very significantly, investments have gone down even more. Investments in a way determine the potential of the economy also. So I think unless this reverses, then this does have a medium term consequence as well, whereas consumption can bounce back.
Govindraj Ethiraj: We, of course, went from eight quarters of slow down into a lockdown. Now, how much of that is really impacting these numbers?
DK Joshi: Well, I think the slowdown I mean, if you if I were to decompose the first quarter into months, let's say. I don't have GDP for each month, but April was the most stringent lockdown I think that India had I think, among whatever lockdowns was there in the world. I think according to the Oxford stringency index, it was one of the most (stringent). So economic activity came to a sudden stop in some sense for a large part of the economy. So that part was more impacted. After that May and June, I think there were relaxations. So we did see, in high frequency data, things moving up. But the point is they're still 10% below the pre-COVID level for most of the activities. So you are stabilizing at a level which is still below what you would treat as a normal level of activity, which essentially means you are degrowing.
Govindraj Ethiraj: I'll come back to that in a moment. So you know, now GDP is relative. As in when we talk about a 23% fall or 23.9% fall in our country now. There are GDP figures that have come out now for this quarter for all countries, or most countries, and the IMF has also released figures. But India seems to have contracted or done the worst. Now all countries went into lockdown, all have faced a similar problem. And like I said, it's a relative to your own figure. I mean, you're only comparing our own figures in the previous year. So why is it that India has got hit more?
DK Joshi: Well, I think that's a very interesting question, because I think if I were to just draw parallel very quickly to the global financial crisis, at that time, we were growing 300 basis points above the global growth, which was mildly negative, during the peak of the crisis. This time around, we are going to grow slower than the world economy. So I think the global outlook is 3.8%. So we have actually slipped below that. So which essentially tells you that we are getting impacted disproportionately more than other economies.
I think there's several reasons for that. One of them is the initial conditions. You entered the crisis with, if I were to use that term, weak immunity so to say. Because I think whether it is the financial sector which was in a clean-up process, the GDP growth was slowing down. Within that, investments were already negative, I think. And in the last quarter, private consumption was also weak and exports were also shrinking. So you entered the crisis with a little low immunity and what the crisis did was, it magnified all those problems. So if you entered with a slightly stronger wicket, I think the hit would not be that much. Now, the only way to offset this is to give pumping a huge amount of stimulus, which I think India's stimulus is a little lower than other economies. Though it is not the major cause of the difference. Major cause of the difference is that you have weak initial conditions and you need more support to the economy if you want your GDP to suffer less.
Govindraj Ethiraj: So can you dwell a little on the you know, that the line that I quoted from you earlier which talked about, you know, the impact of successive lockdowns and the nonlinear and multiplicative effect on the economy. So are we, you know, suffering more because we've extended the lockdown and maybe if he had not, then things would have been very different.
DK Joshi: Well that's very hard to say but I think what I meant by successive lockdowns was that if you have the lockdown of the same intensity, let's assume, then I think two month lockdown is not two times as much as the one month. It is more than (that). So I think since the intensity has been coming down, the impact of lockdown on the economy is also not that severe, I mean, so to say. So the non linearity exists. I mean, if you stay very weak for a long period of time, obviously your buffers will keep getting eroded and I think the businesses will become more and more vulnerable. I think that is true. But in terms of the stringency of the knockdown, I think it is becoming less and less stringent. So, it is kind of in a way of setting that non linearity that I was talking about.
Govindraj Ethiraj: You said that some sectors are doing well, one of them is agriculture. And let me quote you again saying that "Agriculture is resilient because crops will keep growing whether there is COVID or not."
DK Joshi: Yeah, I think that's true because I think the production trends are pretty healthy, rails are normal for most parts of the economy where I think our currency is prominent. Also I think the swing has progressed reasonably well. So fertilizer consumption or whether it is pesticide, tractors, everything is indicating that okay, maybe this segment is somewhat better. And I wanted to point out that in a pandemic situation, agriculture may only have 15% weight in GDP, but it punches more than its weight in GDP, because one it supports about 40% of the population directly or indirectly. And second, nutrition is so important during a pandemic. So that's a saving grace, I think that agriculture is doing well. What was the next question you had? I mean, besides agriculture?
Govindraj Ethiraj: The question is that if agriculture is resilient, as you have pointed out, and it's not affected by COVID, then to what extent does it counterbalance all the other sectors that have not done so?
DK Joshi: From a welfare perspective it does, as I said, a nutrition perspective, food security perspective, it is very, very important. I think that there's no doubt about that. But beyond that, I think if you measure economic activity it has GDP, it only has a share of 15%. So it really can't offset the rest 85% which is sinking deeper. But where I think both industry and services, we have seen the data. I think construction, the most labor intensive sector, I think shrank by almost 50%. The investments have also fallen by 47%. So I think there's been a deep deep hit I mean, no matter how you slice it and dice it. Overall, I think the hit in the first quarter has been very deep.
Govindraj Ethiraj: So what will it take to recover all of this? I mean, the lost GDP, the lost growth, the lost production and productivity?
DK Joshi: You need to grow very fast if you want to recover whatever you've lost. You would have grown at 5% let's assume. If you're growing at -5%, then this is 10% of GDP. Will you recover it in the next couple of years? Very unlikely. Even if you grow at 7% per annum for the next three to four years, I think this permanent loss will stay. You need to grow more than 11% to recover this loss. So some part of the GDP is lost.
I think, as far as productivity etc, is concerned, that I think will depend to some extent on what kind of reforms are pushed ahead. I mean, particularly I'm talking of agriculture. If agricultural reforms. If markets are developed, and I think we push this reform. But then I think that does create an upside I think to agriculture production. And you can I mean, be an exporter and all those things can play out. I think the other thing which can offset this is I would say that the two reforms which the government had started, which was IBC, the Bankruptcy Code, and the second one was GST. They are still undergoing changes, they've not been streamlined as yet.
Reforms pay off with the lag. So I think if the government focuses on streamlining them, then I think whenever the recovery starts, I think that will contribute positively to efficiency. I think these are the measures which will help you over the long run. In the short run, I think you still need to spend more so that the bridge between the crisis and the recovery is strong enough to carry the businesses and the individuals to the other side.
Govindraj Ethiraj: That's a positive note in a way to end on. DK Joshi, Chief Economist at CRISIL. Thank you very much for joining us.
DK Joshi: Thank you. It's always a pleasure.
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