Context

But the quest for sustained higher growth has been elusive for India for the last five years. The pandemic seems to make it more elusive.

The magnitude of contraction in the economy

• There is nothing encouraging in the provisional estimates of annual national income (2020-21), released by the National Statistical Office.
• The agriculture sector continued its impressive growth performance, reiterating that it still remains as the vital sector of the economy, especially at times of crisis.
• The manufacturing sector continued its subdued growth performance, failing to emerge as the growth driver.
•  The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%) and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
• Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q4 of 2020-21 is showing a growth of 1.6%.
• The magnitude of contraction in the economy and the policy responses towards it raises an important issue of growth prospects for the next year.

Contextualising the current growth rates in terms of following three macroeconomic data would provide us a better perspective on growth recovery.

1) Rising unemployment

• The unemployment data released by the Centre for Monitoring Indian Economy (CMIE) says, that in May 2021, India’s labour participation rate at 40 per cent was the same as it was in April 2021.
• But, the unemployment rate shot up to 11.9 per cent from 8 per cent in April.
• A stable labour participation rate combined with a higher unemployment rate implies a loss of jobs and a fall in the employment rate.
• The employment rate fell to 35.3 per cent in May 2021 from 36.8 per cent in April 2021.
• According to CMIE, over 15 million jobs were lost in May 2021.
• May 2021 was therefore a particularly stressful month on the jobs front.

Takeaway

• Employment and aggregate demand in an economy are related via the channel of disposable incomes of workers.
• Aggregate demand and output growth have a positive correlation.
• Hence, the prospects of growth revival in the next year look bleak at the moment and from employment perspective.

2) Low business confidence

• It is the second important data point that needs to examined.
• Business confidence index (BCI), from the survey by the industry body FICCI, plummeted to 51.5 from 74.2 in the previous round.
• The survey also highlights the weak demand conditions in the economy.
• Compounding this is the uncertainty arising out of the imposition of localised curbs due to the second wave of infections and a muddled vaccine policy in the country.

3) Low PMI

• Manufacturing Purchasing Managers’ Index (PMI) has slipped to a 10-month low indicating that the manufacturing sector is showing signs of strain with growth projections being revised lower.
• Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.

Why focusing on supply-side will not work

• Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures.
• This policy stance is unlikely to prop up growth for three reasons.
• First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side.
• Second, large parts of all the stimulus packages announced till now would work only in the medium term.
• Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side as this could result in poor growth performance if private investments do not pick up.
• Further, the credit easing approach would take a longer time to multiply incomes as lending involves a lender’s discretion and borrower’s obligation.

Way forward

• Growth recovery depends on demand recovery.
• The combined increase in exports of April and May 2021 is over 12% indicating that global demand rebound is much faster than the domestic demand. 
• What needs to be addressed immediately is the crisis of low domestic demand.
• A tight-fisted fiscal policy approach comes at a time when conventional fiscal stimulus packages might not be enough as supply side issues arising out of episodic lockdowns need to be addressed simultaneously.
• Focusing on short-term magnified growth rates resting on low bases might be erroneous, as income levels matter more than growth rates at this juncture.

Conclusion

India needs a sharp revival of demand for which higher per capita incomes are necessary.

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