As anticipated, Central Statistical Organisation (CSO) announced on 31st August that the Gross Domestic Product (GDP) in Quarter ending June 2020 shrunk by 23.9% compared to the same period in previous Financial Year. All sectors of the economy except Agriculture show massive decline – construction -50%, Manufacturing -39.3%, Services -20%, Electricity -7%, Trade & Hotels -47%. This level of negative growth is the worst among all big economies of the world as all G7 economies have shown better performance than India. Shocking as these figures are for many bourgeois analysts who were expecting a shrinkage of less than 20%, these figures are quite an underestimate if we examine the methodology of the GDP calculation as, to state only one among many reasons for this underestimation, the rate of decline in informal sector is assumed to be the same as that of the formal sector of economy since the real data for informal sector is collected only once in 5 years. However, as anyone having some idea of real economy knows the impact of lockdown has been far more severe and brutal on the informal sector. According to former chief statistician Pronab Sen, real negative GDP growth rate might be of the order of 35%.

There should be nothing surprising in this data as the corporate results had already indicated it. In a sample of 1549 companies for which results are available for Q1 sales declined by 27.1%, Profit Before tax (PBT) declined by 50.6% and Net profit declined by 63%. This lower level of activity is also reflected in the wage bill of the companies. CMIE analysed the wage-bill of 1,560 listed companies in Q1. It went up by less than 3 percent, which is the lowest increase in 18 years. But even this small hike hides the fact that in most sectors the wage-bill went down, instead of rising. If you take out banking, brokerages and telecom companies – all of which did well during the lockdown – the wage-bill of listed companies shrunk in every other sector. The worst hit was the tourism industry, where expenses on wages dropped by 30 percent. Textiles saw a 29 percent drop, leather was down by over 22 percent, auto-ancillaries down 21 percent, automobile companies saw a 19 percent drop in their wages, road & transport companies cut their wage-expenses by 28 percent as did education businesses. The real estate sector saw a wage-bill decline of 21 percent, which is almost the same as the cuts in the hotels and restaurants sector.

However, the Modi government and it drum beaters in the media were trying to paint a rosy picture all along by pointing towards trade surplus and increase in foreign exchange reserves. Between 27 March and 14 August this year, foreign exchange reserves rose 12.6% to $535.25 billion whereas during a similar period in 2019, forex reserves rose by just 4.5% to $430.5 billion. Clearly, there has been a very rapid increase in the country’s foreign exchange reserves since March-end, after the negative economic impact of the coronavirus pandemic was first felt. Some economic and political commentators have tried to pass this increase as evidence of improvement in the overall state of the economy. Let us look a little deeper into that.

Goods imports between April and July fell 46.7% to $88.9 billion meaning lesser reserves have been used to pay for imports. This essentially shows a slump in economic activity since the onset of lockdown. India imports a large part of the crude oil that it consumes. During the first four months of the current fiscal year, the country imported around 82% of the total oil it has consumed. Nevertheless, the total oil and petroleum products imports have fallen by 55.9% to $19.6 billion, a clear impact of the lockdown. While imports fell by 46.7% in the first four months to $88.9 billion, goods exports fell by 30.3% to $74.9 billion. Hence, trade deficit, the difference between imports and exports, fell by 76.5% to $14 billion as against $59.4 billion last year. This difference of $14 billion was more than made up for through other sources, pushing up the reserves.

Besides reduced imports, there are other arithmetical factors that have pushed forex reserves up. As the price of gold has increased, between 27 March and 14 August, the value of gold held by the Reserve Bank of India (RBI) has jumped by 21.7% to $37.6 billion. Clearly, not just individuals have benefited from owning gold as it has rallied, RBI forex reserves have gained too. Over and above this, with people not leaving India for holidays, business trips or education, the demand for foreign exchange while travelling abroad, has taken a beating. Foreign institutional investors (FIIs) bring money primarily in dollars. These dollars need to be exchanged for rupees before they can be invested. Between 1 April and 24 August, FIIs have net-invested ₹77,779 crore in Indian stocks. Assuming one dollar to be worth ₹75, this means that FIIs have brought in more than $10 billion this year into India and this has ended up with RBI as foreign exchange reserves. Hence, increase in foreign exchange reserves has either no bearing on real economy or is on account of slowdown in economic activity.

This slump in real economic activity was bound to have impact on employment position. There has been widespread loss of jobs, substantial pay cuts, and disruptions in education and training programmes. A recent survey published by the Centre for Monitoring Indian Economy states that 1.89 crore salaried Indian workers have lost their jobs during the period between April and July this year. The estimate was based on a survey conducted across 1.74 lakh households. Many of these salaried workers are in the informal sector, which has been affected adversely. Micro businesses, street vendors, self-employed workers, daily wage earners, such as construction workers and household help, have lost their incomes and jobs. Another report published jointly by the International Labour Organization and the Asian Development Bank claims that 41 lakh Indian youths in the age group of 15-24 lost their jobs during the pandemic. About two-thirds of firm apprenticeships were lost, as were three-fourths of all industry internships. 

According to labour market experts, the employment situation is unlikely to improve before 2022-23. Even the Reserve Bank of India has claimed that economic recovery will only start in the second half of 2021. But two things must be remembered in this context. First, there was a backlog of unemployment from 2019. Last year, there were 16 crore youths who were not in employment, education or training. While the adult unemployment rate was 3 per cent, the youth unemployment rate was 13.8 per cent. Second, this drag on unemployment will increase even further as 10 million young Indians finish some sort of education programme or training every year. Hence, by 2022, the absolute volume of unemployed youth is likely to be alarmingly high.  The government, however, does not seem to be bothered by it. The official thinking is that everyone will acquire skills and become successful entrepreneurs as if by some magic.

Result of the creation of this humongous reserve army of unemployed workers is falling wages in all sectors of the economy, shrinking aggregate demand and excess industrial capacity leading to very low capacity utilisation and falling rate of cash generation and profit. Hence, investment in fixed capital formation is also falling. Therefore, Gross bank credit has fallen sharply since the lockdown. The credit squeeze has hit all the sectors. Credit for agricultural, MSME sector, education, consumer durables and housing are all down. The only one exception is “Large” industry.  Nearly 90% of deposits raised by banks since end March have been invested in government bonds.

Without going into details, it is apparent from above that large number of businesses are incapable to service their loans taken from financial capitalists and large number of these loans are likely to have become Non Performing Assets (NPA). But we don’t know the reality as banks have been allowed to relax NPA recognition norms and even the operation of Insolvency procedures brought as the biggest economic reform by this government has been suspended. Many estimates have come from analysts. However, the only real number available to us at present is the moratorium allowed to borrowers after lockdown was imposed. The 6 month window of loan moratorium ends on August 31st and it has been reported in financial press that almost 31 percent of the banking system’s loans are under moratorium. Now RBI has allowed repayment of these loans to be restructured. It is to be remarked that for the first time Retail loans have been allowed to be restructured in addition to the Corporate Loans. That is enough evidence that RBI understands that crisis is severe and even the middle class households taking housing, car and other personal consumer loans are in severe liquidity crunch. However, no restructuring can resolve this problem. It is only a measure to kick the can down the road. Even the agriculture sector is facing huge upsurge in NPAs and Banks have turned wary in the face of growing farm NPA’s, and are not extending farm loans, which is forcing farmers to borrow from private moneylenders, who charged 24-36% interest in the past, but are now asking for 48-60%. This will further intensify the process of bankruptcy and dispossession of small landowners.

Former Chief Economic Adviser Kaushik Basu says India is not just slowing down, it is dropping rank in all global charts. Consider the 42 major economies in the world for which The Economist provides data every week. Till six or seven years ago India was, for several years, among the three or four fastest-growing economies. For 2020, it has dropped to 35th among the 42 nations. Second, while the pandemic has made the situation much worse, the slowdown cannot be put down entirely to covid-19. It began well before that. In fact, from 2016, India’s economy has moved as though it was walking down one of the many historic stepwells one sees all over India, with each year’s growth rate lower than the previous years.

Still much problem lies with disastrous management of the pandemic. When the lockdown was announced on 24 March, a lot of naïve people got hope from this early action. But within days, it became clear that no supporting policy action and relief measures that such a major, sudden lockdown needs had been readied. While our cities, factories and transport, and therefore the economy, were totally locked down, it was evident that no plan had been made for the tens of millions of migrant workers who were suddenly left with the stark choice of remaining locked down and perishing or trudging hundreds of miles across the nation, just to go home. Leaving aside the lack of empathy and compassion that this policy signalled, it achieved the very opposite of what a lockdown should do. Some 4 or 5% of India’s population were literally sent off like sprinklers across the nation. No matter how one cuts and splices the covid-19 data, it is clear that India’s ‘lockdown-and-scatter’ has caused the virus to spread and also hurt global confidence in India, which is fuelling the economic slowdown.

The fact that India has become the third-most infected nation in the world and is expected to overtake Brazil and be second within a month, behind only the United States, is not the big worry. India is the world’s second-most populous country and there is no surprise that it will tend to have more absolute numbers of people testing positive for covid-19. It is important to normalize using the population as a base. So, we should look at the data on cases of covid-19 per one million population and number of deaths caused by this virus per one million population. The latter is referred to as the Crude Mortality Rate (CMR).

Once we do this, it becomes clear that India’s performance is very poor, even correcting for population. Over the last few weeks, India has overtaken first Pakistan and now Afghanistan to become the nation with the highest CMR in South Asia. For every million population, there have been 47 coronavirus deaths in India. The number for Afghanistan is 36, Pakistan is 28, Bangladesh 24, Nepal 6, Sri Lanka 0.6. The contrast becomes clear just by looking at the graphs of daily new cases (3-day moving average) in three neighbouring countries: India, Bangladesh and Pakistan. At the end of March, all three were roughly similar. After the severe and sudden lockdown in India, for some weeks, the three nations looked similar, with India looking slightly better than Bangladesh and Pakistan. But then, the flattening of the curve that was expected did not happen in the case of India. The lockdown had clearly backfired.

The lockdown froze a large part of the economy, but inhuman treatment of workers did exactly the opposite of what a lockdown does. What we are seeing now is the outcome of this lockdown-and-scatter approach. India is seeing one of the worst spreads of the virus. Moreover, economic growth has plummeted, and unemployment has shot up. Even from the bourgeois analysts and investors’ point of view, the poor management of the virus, visible all over the world, has shaken up all trust in Indian institutions. This added speed to the growth slowdown which was already underway and has taken India further down the stepwell. One of the most important drivers of long-run growth is the investment rate—the share of the national income that is invested in machines, factories, infrastructure, human capital and research. India’s investment, or gross capital formation, as a percentage of GDP was at 38.1% in 2008 and 39% in 2011. Then, it started falling, slowly initially, and rapidly thereafter, and was standing at 30.2% even before the pandemic.

The result is that Indian government is in deep financial crisis. Federal fiscal deficit in the four months to end July stood at Rs 8.21 trillion or 103.1% of the budgeted target for the current fiscal year. Net tax receipts were Rs 2.03 trillion, while total expenditure was Rs 10.5 trillion. Central Government fiscal deficit is expected to reach 7.5% as against the budgeted 3.5%. The result is the fracas on GST compensation between the centre and states of which we will not go into detail here except that the economic slowdown started several years ago, and the non-payment of GST dues began more than a year back, well before the virus. GST is a crisis made by this govt, not by Covid alone.

What we are concerned here is how the government is financing this deficit. The entire financial savings of India’s household sector are down to 7% of GDP, and government borrowing is much more than that. Hence despite all efforts by RBI and government and immense pressure by industrial capitalists, interest rates have not been subdued and keep rising again and again persistently. Even after lot of ‘Twist and Roll’, and reverse twist at that, by RBI to inject liquidity, interest rates on 10 year government securities have again rose above 6% in last week of August.

Then how is this deficit to be financed? The only way out is monetisation, also popularly known as printing of currency notes, though these days it can be easily done only through few clicks on computer. RBI has not announced but it is known in financial circles and remarked upon in financial press that RBI is already doing this indirectly by buying up securities from Primary Dealers who initially subscribe to the issue. Effectively the finance to the government is coming from RBI and that means monetisation of the deficit by expanding money supply. The new proposal from central government on GST that states should borrow from RBI, to be repaid by collection of Cess on GST, will also mean the same – expansion of money supply.

However, in an economy where real commodity production is not growing, expansion of money

supply means rising inflation. That is already happening. RBI said in its annual report for 2019-20 that headline inflation picked up strongly during the closing months of 2019-20 and the short-term outlook for food inflation has turned uncertain, “Disruptions in food and manufactured items’ supply chains could amplify sectoral price pressures, thus posing an upside risk to headline inflation. Heightened volatility in financial markets could also have a bearing on inflation”. All of these may influence inflation expectations of households, which are adaptive in nature, and show significant sensitivity to shocks to food and fuel prices, the report said. Monetary policy, therefore, has to keep a constant vigil on price movements, especially as they can translate into generalised inflation. According to government data, retail inflation rose to 6.93 per cent in July, mainly driven by rising prices of food items like vegetables, pulses, meat and fish. In its monetary policy review earlier this month, RBI had said that the retail inflation is expected to be at elevated levels during the second quarter but may ease in the second half of the current fiscal year.

But inflation is, in fact, a tax on the people. It means fall in real income as they can buy less of the commodities required for sustenance for the same amount of wages. But in India nominal wages itself are decreasing. So, this expected rising rate of inflation will be a double whammy on the working people, large number of whom have also lost their jobs. It can only mean further indigence, acute poverty, hunger and malnutrition. To put it into context State of Food Security and Nutrition in the World report has already said that the number of Indians living with food insecurity rose by more than 60 million between 2014 and 2019. Now this will further speed up.

Hence, what is the result of this all? Fact is inflation, unemployment, indirect taxes, usurious interest rates for small peasantry all mean only one thing – though the crisis is caused by capitalist class, its back breaking and crushing burden is to be put on the workers, poor peasants and lower middle class people. And it will further dehumanize them if they do not become conscious, get organized and rise up against it.

Originally published in the Editorial of The Truth: Platform for Radical Voices of The Working Class (Issue 5/ September ’20)

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