Number Theory: The data India needs to diagnose the economy
India imposed one of the world’s most stringent lockdowns -- it went on for 68 days -- starting on March 25 to curb the spread of Covid-19 infections. It was this lockdown which triggered a record contraction of 24% in India’s gross domestic product (GDP) in the first quarter of fiscal 2020-21. The economic shock led to projections of a sharp fall in GDP in 2020-21. With the removal of lockdown restrictions, and more importantly, no second wave of infections, the economy is expected to do better than had been expected.
Most forecasters, institutional and private, have revised their GDP estimates for both 2020-21 and 2021-22. Many, including the government, claim that the economy is on course to a V-shaped recovery, and the lockdown has not left any significant scars on the economy. Others, including some reputed economists, do not agree with this assessment. They argue that a large section of the economy has suffered badly because of the disruption caused by the lockdown and this will continue to generate headwinds for growth. Which of these sides is closer to the truth? Unfortunately, we do not have enough empirical evidence to clinch this debate either way at the moment. Here are four data points, which we do not have, but could have helped in settling this debate.
Consumption levels and inequality in India
India does not have official statistics on income. The closest proxy for these is the Consumption Expenditure Survey (CES) which used to be conducted every five years by the National Sample Survey Office (NSSO). The latest results for CES go back to 2011-12. While a CES was conducted in 2017-18, its findings were junked by the government. Private Final Consumption Expenditure (PFCE), which accounts for more than half of India’s GDP, is the single largest determinant of growth. Headline PFCE growth fell sharply from 7.6% in 2018-19 to 5.6% in 2019-20 and further to a 9.4% contraction in 2020-21. However, we still do not know the nature of this slowdown and contraction. Is it the poor who have been consuming less or has there been a deceleration across classes? This information is crucial in making any policies to boost consumer spending. India conducts a large Periodic Labour Force Survey every year for employment statistics. There is no reason why the same cannot be done for consumption expenditure.
Inflation numbers can vary depending on the average consumption basket
India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI), stayed above the upper limit of the Reserve Bank of India’s tolerance range between April and November 2020. The moderation in inflation in December was largely on account of a sharp fall in vegetable prices. Inflation going out of control can hurt real incomes and, therefore, demand.
The headline inflation index is a weighted average of different items in what is deemed to be the average consumption basket of a household. This is decided on the basis of CES data. Because India does not have CES data after 2011-12, CPI has not been updated for possible changes in the consumption basket. The weight of food items in subsequent CES has been coming down in India. This would suggest that inflation numbers could be lower -- food has been a major driver of inflation -- if the CPI basket were to be updated. The 2020-21 Economic Survey hinted at this when it called for greater focus on core (non-food, non-fuel inflation) rather than the headline inflation number. What has also been happening to households’ food budgets is a shift from cereals to fruits and vegetables. This could make the headline inflation number far more volatile going forward.
Intra-country remittances data
The biggest disruption the lockdown inflicted was on incomes of migrant workers, millions of whom were forced to return to their homes in the countryside. A disruption to the migrant-worker economy entails a double whammy for the economy, because their incomes are crucial drivers of consumption in both their place of work as well as their villages and home towns. The latter is on account of remittances. It is an important determinant of consumption in states that send a lot of migrant workers out. For example, a 2018 World Bank paper by Gaurav Nayyar and Kyoung Yang Kim found that migrant remittances had a share of 35% in Bihar’s gross state domestic product (GSDP) and positively affected consumption at the household level. Thanks to what can be termed a digital revolution in the financial sector, many blue-collar workers use formal channels to send money back home. Suitable filters can be applied to build some sort of a database to capture this movement. This can help a lot in connecting the dots between the economic fortunes of urban clusters and migrant exporting regions.
A more frequent debt and investment survey
The pandemic is expected to have a mixed effect on household finances. Experts have pointed out that many households could have increased their savings due to two reasons. First is what is referred to as a precautionary motive, with non-essential spending being deferred in the expectation of a health or income shock. Secondly, the lockdown is expected to have disrupted many consumption activities such as travelling and eating out and added to the savings pool. On the other hand, there have also been anecdotal accounts of households having to deplete their savings to cope with the pandemic’s economic shock. Reports of withdrawals from provident fund accounts and a proliferation of predatory online lending platforms, which charge very high interest rates, are some such examples. Going forward, these are expected to have opposite effects on aggregate demand. While forced savings could be deployed aggressively in the future, households with depleted savings or accumulated debt are likely to cut back on consumption. It would help if we had a clear idea of what the net effect has been across different households.