Recovery from 2020-21 cannot be automatic

by Mahesh Vyas

The Indian economy shrank by 6.2 per cent or 7.2 per cent in 2020-21 depending on how you measured it, by GVA or GDP. In lay terms this means that in the year of the pandemic, India produced goods and services that were 6.2 per cent lesser than in the previous year but, it consumed 7.2 per cent lesser than it did in 2019-20. Such a large difference between production and consumption is unusual. National accounts statisticians like true-blue accountants ensure that the supply side matches the demand side. Last year the government delivered a curved ball to them by settling some very large past dues of food subsidies. Subsidies are deducted from GVA to derive the GDP and so the greater fall in GDP compared to GVA. Why did the government choose the terrible year to settle historical off-balance-sheet IOUs when it should’ve been borrowing aggressively to spend its way out of the recession will remain a mystery. Nevertheless, the pain of shrinking 6 or 7 per cent is equally numbingly agonizing.

No professional economic forecaster emerged from 2020-21 with an unscathed reputation. Around early-April 2020, the consensus forecast for 2020-21 was a growth of 5.3 per cent. Economists probably believed that the 21-day national lockdown would rid the country of the virus and business would revert to the gently-falling trend of GDP growth seen in the preceding years. In early June 2020, when the mayhem was there for all to see, professional economic forecasters predicted a modest fall of 1.3 per cent. We couldn’t see the precipice even when we stood on its edge.

The 6.2 per cent fall in GVA in 2020-21 now poses a challenge in forecasting the outcome in 2021-22. The default prediction seems to be that these bad times will pass soon and India will return to its robust growth rates. Data from RBI as of early April 2021 suggests that professional forecasters expected real GDP to grow by 10.9 per cent in 2021-22. By early June 2021, the forecast was scaled down to 9.7 per cent.

There are two problems with these forecasts. First, they do not seem to adequately account for the several downside risks to India’s growth story in 2021-22. The forecasts seem to assume that there is no risk associated with incomplete vaccination, that there would be no third or fourth wave, that trade can continue to grow, that India will see for the first time in its history, a fifth consecutive year of normal monsoon and a corresponding record in foodgrain production, that the economy can thunder through a complete recovery even as government spending is budgeted to almost remain flat. The forecasts assume that the low base of 2020-21 automatically bestows a right to grow back to a normal in 2021-22.

Second, it assumes that the experience of 2020-21 left no scars that could hurt future growth. It therefore assumes that the micro, small and medium enterprises that succumbed to the lockdowns will spring back to life. It assumes that the shrunken demand because of job losses and income casualties would have no bearing on aggregate demand; that investments would continue on a trend path unperturbed by the shrunken demand and excess capacities on hand.

There is also a very different concern regarding these forecasts. They don’t forecast the Indian economy as much as they forecast what the CSO’s estimates would turn out to be. Institutional consumers of official data have a way of parsing these official numbers and they do the same for the forecasts by the professional forecasters. So, business continues in the company of some well-parsed jargon.

The biggest challenge to growth in 2021-22 is of vaccinations. If adequate people are not vaccinated, mobility will have to be restricted because of the fear of a new wave of Covid-19 infections emerging. If mobility is restricted, economic growth will be hampered. The pace of vaccinations has fallen and its pace of growth is volatile and uncertain. Only the government can find a way out of this economic logjam. It can do so by organising rapid and adequate vaccinations and by spending aggressively.

But, there seems to be significant hesitancy or inordinate delays on this front. Central government spending in April and May 2021 was underwhelming. It was lower than the spending during April-May 2020 and also lower compared to the spending in corresponding period of 2017, 2018 and 2019. Revenue collections were strong in these months but spending was not.

Growth in the quarters ended December 2020 and March 2021 were driven by acceleration in agriculture and some very handsome profits of listed companies. These are not sustainable. Agriculture has been growing at over 3 per cent for seven quarters in a row because of expansion of arable land and persistently good monsoon. Arable land is finite and monsoon is not entirely reliable. So, sustained growth prospects may be limited. We expect agriculture to grow by a lower, 2.3 per cent in 2021-22.

If corporate profits have risen because they have gained market share from smaller enterprises who could not survive the Covid storm or because of a favourable shift in terms of trade then this is a zero-sum game and GDP should not spike because of this. But, the official statistics will show some spike because the unorganised sectors are under-represented in them. We expect industry to grow by 6.7 per cent in 2021-22 after having fallen by nearly 7 per cent in 2020-21. But, in the following years, we expect growth to slow down to an average of about 4.5 per cent per annum. Services is expected to recover partially from a fall of 8.4 per cent in 2020-21 to 7.1 per cent in 2021-22 and then settle to a slower growth of about 5.5 per cent per annum.

We do not see any triggers for an accelerated recovery from the fall of 2020-21. And, we believe that acceleration in the growth rate cannot be automatic. This is the challenge.

CMIE’s forecasts for growth in 2021-22 are conservative although even these ignore the risks mentioned earlier. We expect real GDP to grow by 7.2 per cent and GVA by 6.2 per cent. The trend growth is likely to be close to 5 per cent thereafter. India’s GDP and GVA in 2021-22 would be lower than they were in 2019-20. That wouldn’t be a good place to be more than a year after the world found vaccines.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.4 +0.5
Consumer Sentiments Index
Base September-December 2015
73.4 +0.2
Consumer Expectations Index
Base September-December 2015
72.0 0.0
Current Economic Conditions Index
Base September-December 2015
75.6 +0.6
Quarterly CapEx Aggregates
(Rs.trillion) Sep 21 Dec 21 Mar 22 Jun 22
New projects 3.34 3.91 7.76 3.79
Completed projects 1.28 2.76 1.25 1.05
Stalled projects 0.28 0.08 0.28 0.25
Revived projects 0.39 1.98 0.28 0.28
Implementation stalled projects 0.26 0.65 0.09 0.08
Updated on: 08 Aug 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Sep 21 Dec 21 Mar 22 Jun 22
All listed Companies
 Income 27.5 23.4 20.9 39.6
 Expenses 26.7 21.3 19.8 42.5
 Net profit 55.8 35.4 32.1 9.4
 PAT margin (%) 9.6 9.0 9.1 7.1
 Count of Cos. 4,695 4,739 4,575 1,430
Non-financial Companies
 Income 35.6 29.1 24.9 51.9
 Expenses 35.9 28.7 25.6 57.5
 Net profit 59.4 19.1 12.5 -9.5
 PAT margin (%) 8.8 7.5 7.9 5.4
 Net fixed assets 4.9 2.2
 Current assets 10.9 15.2
 Current liabilities 0.8 11.7
 Borrowings 12.2 3.6
 Reserves & surplus 12.4 11.5
 Count of Cos. 3,382 3,424 3,317 1,041
Numbers are net of P&E
Updated on: 08 Aug 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -0.9 18.9
 Expenses 0.4 -3.2 16.4
 Net profit -5.8 73.4 62.3
 PAT margin (%) 2.0 4.4 10.9
 Assets 9.0 9.9 10.1
 Net worth 4.8 11.7 12.6
 RONW (%) 3.4 6.9 13.4
 Count of Cos. 32,607 30,609 2,075
Non-financial Companies
 Income -1.1 -2.0 27.5
 Expenses -0.9 -4.0 26.3
 Net profit -22.1 64.4 58.8
 PAT margin (%) 2.2 4.1 11.0
 Net fixed assets 11.2 2.2 3.3
 Net worth 2.1 10.7 13.1
 RONW (%) 4.6 7.8 17.5
 Debt / Equity (times) 1.2 1.0 0.5
 Interest cover (times) 1.9 2.4 6.9
 Net working capital cycle (days) 82 86 44
 Count of Cos. 25,804 24,027 1,526
Numbers are net of P&E
Updated on: 05 Aug 2022 10:42AM