The Indian Economy on The Verge Of Collapse -Prabhat Patnaik

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published Published on Sep 14, 2020   modified Modified on Sep 15, 2020

-Networkideas.org

The GDP growth in the first quarter (April-June) of 2020 over the first quarter of the previous year has been minus 24 per cent according to preliminary official estimates. But most knowledgeable people believe that even this is an underestimate of the actual contraction brought about by the lockdown. In fact, a former chief statistician of India, Pronab Sen, believes that the actual contraction would have been about 32 per cent. Others put the figure even higher.

But even at the official figure of minus 24 per cent, India’s first quarter contraction has been greater than that of any other major economy of the world. This is hardly surprising since India’s lockdown too, whose main phase coincided precisely with the first quarter, had been the most draconian among all major economies. It not only was announced at four hours’ notice, but also involved shutting down a much larger segment of the economy. Of course, even this draconian lockdown had little effect on the spread of the coronavirus: India’s daily addition to Covid-19 cases is still climbing, long after the lockdown has been relaxed, while that of almost every other country of the world has started coming down; but that is a separate issue.

The most significant feature of the lockdown was that the lakhs of workers who lost their jobs immediately and most of whom started trekking back to their villages hundreds of miles away, were not provided any succour by the State. There was no universal food or cash transfers to the population from the State unlike in most other countries. The 5 kg of additional foodgrains per head per month promised to about 80 per cent of the population reached only a fraction of them because of the rigid insistence upon identity proof; and no universal, or even widespread, cash transfers were even promised. Not surprisingly, while an economy like the US had a relief package amounting to 10 per cent of its GDP, Germany had a package amounting to 5 per cent of GDP, and Japan an even higher percentage, India’s relief package which was announced in two phases was just about 1 per cent of GDP, after leaving out what were merely repackaged items from the annual budget presented earlier (see People’s democracy, May 24). India was thus unique among countries in announcing a draconian lockdown while providing very little succour for the distressed population.

This brings us to the crux of the matter.The disaster staring the Indian economy consists not in what we have just experienced, but in what lies ahead. During the lockdown, lakhs of workers who lose their employment and hence incomes, have to run down whatever savings they have accumulated until then, or to borrow from others, in order to maintain even their subsistence level of consumption. When the lockdown gets lifted they have to replenish their depleted stock of resources or to pay back the debt they have incurred; therefore if they get employment after the lockdown, they do not consume their entire income but only a fraction of it, in fact a smaller fraction than they would normally consume.

To see the implications of this fact let us assume for a moment that with the lifting of the lockdown, employment and income recover completely to equal what they were before the lockdown (which would never really happen since investment always takes some time to recover, but let us momentarily ignore this fact). At this level of output however there would be a lower level of demand than before the lockdown, because the workers would be skimping on their consumption in order to pay back debts. There would therefore be a crisis of over-production because of which output will, for this reason alone, be lower than before the lockdown. This means that while there may be a recovery from the extreme output-contraction experienced during the lockdown that recovery would still leave output below what had been previously experienced.

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Networkideas.org, 14 September, 2020, https://www.networkideas.org/news-analysis/2020/09/the-indian-economy-on-the-verge-of-collapse/?fbclid=IwAR16RVQNmruSqgIVt8PvR96F6JnGOEha-UidAIhMGvwMRyEvOCfLIo-WFCg


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