The shadows lurking behind India's Q2 report card

01 Dec 2021

Opinion: Mythili Bhusnurmath

How does one read GDP numbers for Q2 2021-22? In keeping with Miles’ Law — Where you stand depends on where you sit — the reactions from GoI and the Opposition to the data released on Tuesday were entirely predictable. Triumphalism from government and murmurs about the shine lent to the numbers by base effects from the latter. Is it possible to take a dispassionate view? As befits my tribe of ‘on the one hand-but on the other’ economists — about whom Harry Truman reportedly despaired calling (in vain) for a ‘one-handed economist’ — there is good news and bad.

The good news is that at 8.4% Q2 growth is well above most estimates including the Reserve Bank of India’s (RBI) 7.9%. Also unlike in the comparable period last fiscal when every sector save agriculture and electricity contracted this time round all did well. Two in fact have grown sequentially — financial services and public administration the latter up 17.4% from 5.8% in Q1 2021-22 and a contraction of 9.2% in Q2 2020-21.

Together with the stellar growth of 4.5% recorded by agriculture the ground seems to be laid for the much-hoped-for recovery with nominal GDP for Q2 (Rs 35.73 lakh crore) finally surpassing the pre-Covid Q2 level (Rs 35.61 lakh crore). Add to that strong core sector growth (7.5%) in October 2021 improvement in gross fixed capital formation (GFCF) a.k.a. investment strong growth in revenue receipts and better control over revenue expenditure resulting in a fiscal deficit of just 36% of the budget estimate for 2021-22 against 120% of last fiscal’s budget estimate and it would appear GoI’s cup of joy is overflowing.

Alas there is a fly or two in the ointment. Just when we think we are out of the woods there’s a new threat — Omicron. As of now we do not know whether this mutant strain will be as destructive of both economies and human lives as the earlier variant. But when the World Health Organisation (WHO) calls it ‘very high risk’ countries must sit up and pay heed.

Granted a repeat of the 2020 lockdown is highly unlikely. But restrictions on mobility seem inevitable. These are bound to have an adverse consequence on economic growth given the high share (60%) of the contact-intensive services sector in our GDP.

The other elephant in the room about which there is much less uncertainty and is largely of our own making is rising inflation. RBI’s accommodative monetary policy served us well in the early days of the pandemic. But thanks to its tardiness in withdrawing excess liquidity despite average inflation remaining above its target range last year high inflation is here to stay.

At 4.5% consumer price inflation for October 2021 seems deceptively low. But it is only a matter of time before the impact of high wholesale price inflation (12.54%) the highest in five months gets translated to higher retail prices.

In a scenario where traditionally low-inflation countries like the US and Germany are reporting inflation at a three-decadal high of close to 6% and supply bottlenecks could possibly re-emerge it is naïve to expect India will remain an outlier and be able to tame inflation never mind brave talk of inflation being ‘transient’.

Unfortunately neither GoI nor RBI seems fully cognisant of the impending danger. Contrast this with the US. ‘I’m here to talk about one of the most pressing economic concerns of the American people.

And that is getting prices down number one; number two making sure our stores are fully stocked; and number three getting a lot of people back to work while tracking and tackling these two above challenges.’ That was Joe Biden speaking in Baltimore early November.With US inflation hitting 6.2% in October ‘getting prices down’ rather than growth is now Biden’s top priority. Both growth and inflation impact citizens. But while the impact of growth is indirect and usually skewed in favour of the better-off high inflation impacts the poor disproportionately as they do not have neither staying power nor access to social safety nets.

Given the nature of the beast inflation finally will stall growth as well as that is how the remedy — high interest rates — works. With a hike in US interest rates just months if not days away India is in for troubled times. Even if we avoid the taper tantrum of 2013.

Let’s not lose sight of why GDP numbers matter. As Tom and David Chivers point out in their book How to Read Numbers: A Guide to Statistics in the News (and Knowing When to Trust Them) ‘If the people in charge aren’t careful they can lose sight of the fact that the metric isn’t what you really care about but is a proxy for an often complex multifaceted and hardto-define — but nonetheless real — underlying quality which you do care about.’

In the context of GDP the underlying real quality is human welfare. Something that GDP can never capture entirely but the political leadership in a democracy ignores only to its peril.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

Published in: The Economic Times, 01 Dec 2021