Why the June quarter numbers are important
Purchasing Managers’ Indices (PMI) for the month of June will be released this week. PMI numbers for April and May show a huge contraction in economic activity.Updated: Jun 30, 2020 01:55 IST
The first quarter of the financial year 2020-21 ends today (June 30) and analysts and economists are waiting for the release of data to assess the country’s economic performance in the three-month period, and predict how this will affect GDP growth in the full year.
To be sure, economic indicators for the full quarter will take time to come. But Purchasing Managers’ Indices (PMI) for the month of June will be released this week. PMI numbers for April and May show a huge contraction in economic activity. Data on the announcement, completion and dropping of investment projects in the June quarter is also expected this week from the Centre for Monitoring Indian Economy’s (CMIE). Index of Industrial Production (IIP) numbers for June will only be released by mid-August. IIP numbers for March and April show a massive contraction to the tune of 18% and 55%. First estimates of GDP for the June quarter will be released towards the end of August .
Almost all forecasts suggest that India’s GDP will contract in 2020-21. The World Bank and International Monetary Fund expect this contraction to be up to 3.2% and 4.5% respectively. Given these annual forecasts, the June quarter GDP will most likely suffer a contraction in double digits.
There is near consensus among economists that the economy will contract in double digits in the June quarter. Pranab Sen, India’s former chief statistician, expects the contraction to be in the range of 12%-40%. “My theory is that only 40% of the economy; agriculture, goods transport and government, was working at full capacity in this quarter”, he said; 60% of the economy was working at just 10%-20% due to the lockdown, he added. Himanshu, an associate professor of economics at Jawaharlal Nehru University (he uses only one name), expects the figure to be around 25%. An economist who works for a private sector firm and who asked not to be named said the pandemic has forced economists to follow more high frequency indicators such as E-Way bills etc. to keep track of economic activity. It is difficult to get an accurate estimate of GDP numbers as some of the key linkages in the economy have been broken due to lockdown related restrictions, he added.
All of them agreed on the possibility that the government might add strong caveats to the comparability of the June quarter GDP data. While releasing the IIP data for April, the government’s chief statistician Pravin Srivastava said that these numbers were not comparable with previous estimates. The logic that lockdown numbers should not be compared to previous numbers does not stand, said Sen. If companies do not produce anything, obviously they will report zero production, he added.
But how important are the June quarter numbers for the rest of the year?
If there is a very large fall in the June quarter numbers, its effect on economic performance will also be felt in the remaining part of the year, Sen said. It is important to understand that the binding economic constraint due to the pandemic’s disruption will not be static. In the first quarter it was a supply constraint, as the lockdown interrupted economic activity. Because this led to a loss in incomes and employment, the economic constraint will move from supply to demand. Precautionary savings by households will add to the demand deflation, he added. Now, if the demand constraint is not addressed in time, the economy will go back to a supply constraint scenario, as firms, especially MSMEs, go insolvent and production capacity is destroyed, Sen explained.
When asked whether front loading of government expenditure will affect the GDP numbers, Sen drew a distinction between central government and state government responses. While states have front loaded their spending, the centre has not. Most state governments will run out of resources in the second half of the fiscal year. So, unless, the central government boosts spending, we could have an additional demand shock in the economy, Sen said. A government stimulus would not have been very effective when the economy was under lockdown, so now is the best time to start this process; once firm mortality sets in, and production capacity is destroyed, a government stimulus could even be counter-productive, he said.
As far as business and consumer sentiment is concerned, the indicator which matters the most is number of Covid-19 cases, the private sector economist said. Common people do not understand technical terms such as recovery rates and doubling periods. As long as cases do not stop rising, fear will remain and normalcy will not be restored, he added. What private businesses are most concerned about is not the growth in this quarter or even this year. What needs to be assessed is whether and how much will Covid-19 bring down India’s potential growth rate.