Macro Economy

Where’s the V-shaped recovery?

Praveen Chakravarty
September  8, 2021

We have all heard of the fable where a person was searching for his keys under a streetlight, not because he lost them there but because that is where the light was. This ‘streetlight effects is recognised as an observational bias in social science. The government’s economic team seems to suffer chronically from such a bias. According to them, India’s economy is rosy and strong since headline GDP grew 20% in the recent quarter after falling 24% in the same quarter last year. Apparently, it is time to flash the ?V? sign for victory and to reflect the shape of the economic recovery.

First, an economist predicting a sharp GDP recovery after a steep fall is like a meteorologist predicting rains in the monsoon month of July in Mumbai. It is foolhardy to claim such a prediction as an act of genius. Inanities aside, it is important to evaluate the true health of a nation’s economy through the prism of its peoples? incomes and livelihoods rather than shallow indicators like stock market indices or startup unicorns.

In the five months from April to August in the current financial year, when the economy was apparently roaring its way to recovery, 64 million families had at least one family member toil all day in the sun to earn a paltry Rs 200 under the Mahatma Gandhi National Rural Employment Guarantee programme.

Remember, this is designed such that only when the situation is extremely dire and there are no other alternative sources of income, do people queue up to work under MGNREGA. To put this in context, the 64 million families employed under MGNREGA are more than ten times the total number of people employed by all the companies listed on India’s stock exchanges combined. Just last month, 18 million families were dependent on MGNREGA, roughly the same number in August last year when the entire country was under a total lockdown and 50% more than in August 2019.

Clearly, there is no economic recovery, ?V? or otherwise, for these millions of families. If this trend continues for the rest of the year, more people will be dependent on MGNREGA for their incomes this year than in the three years prior to Covid-19 combined, the highest in the programme’s history. So, while stock markets are booming to all-time highs, a record number of Indians are pleading penury and flocking to MGNREGA for a bare minimum income.

Is this the economic recovery to rave abouts

Even behind the government’s 20% headline GDP growth boast in the June 2021 quarter lies a sordid tale of misery for the vast majority. Manufacturing, construction and services are the real economic activities that generate good quality jobs and incomes for large numbers of people. Note their state. Latest CSO data shows that manufacturing activity in June 2021 is at the same level as four years ago in 2017, construction activity is at the level of five years ago in 2016, and trade/transport services activity is at the level of six years ago in 2015 (at constant prices). Real economic activities that provide jobs, incomes and livelihoods for the vast majority are languishing and hence it is no surprise that millions are pleading for work under MGNREGA. When people do not have sufficient incomes, it affects their consumption which is borne out in the fact that private consumption in the June 2021 quarter is at the same level as in 2017.

When private consumption is tepid, businesses refrain from undertaking new projects and investment falls. This is seen in fixed capital formation being stuck at 2017 levels. Thus the economy is trapped in a ?chakravyuh? of gloom. It is well established that free, phantom money created by the United States is finding its way to other countries, pushing up asset prices and financial market valuations that benefit the few rich. Neither does this help improve livelihoods for the vast majority of people nor will this party last long.

It is thus futile and facile to showcase foreign flows or stock market indicators as a sign of the robustness of India’s economy and worse, claim credit for it. The only conversation about the economy that matters is one that creates jobs and incomes for the hundreds of millions of unemployed Indians. A fresh Rs 10 lakh investment in the stock market may push the Sensex up but it produces no extra job, the same investment in a steel manufacturer will produce one new job, in an auto manufacturer will create three new jobs, in a leather goods company will create 70 new jobs, and in a textile-maker will create 240 new jobs, including 80 for women. Even before Covid hit, India’s textile and leather goods production, the sectors that create the most number of jobs, was lower than back in 2014-15.

Covid has only made it acutely worse. Is it any surprise then that unemployment metrics are tracking at multi-decadal highs? Whatever coloured glasses one may choose to look through, it is obvious that the true state of India’s economy is dismal. The lone bright spot in the economy is exports growth, which if sustained can create jobs. But for that, the finance minister and her team should not search for the lost ?economic keys? under some artificial light but in the places where they have actually been lost.

The writer is Chairman of Data Analytics of the Congress party Praveen Chakravarty

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