On economy, follow evidence

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 On economy, follow evidence

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• Q1 GDP decline: Data corroborates that GDP decline in Q1 2021 is due to the pandemic and not the economy’s performance leading into the pandemic, and that the economy is recovering strongly after lifting of lockdowns.
• One quarter of GDP not wiped out: GDP in Apr-June quarter measures economic activity in this quarter. Changes in GDP are compared to the same period in the last year to adjust for seasonality. Thus, comments by some analysts that one quarter of GDP has been wiped out in the last 12 months is incorrect. The only inference is that economic activity in Apr-Jun 2020 was 23.9% less than in 2019. 
• The lockdown was essential: India’s severe lockdown was essential because of its high population density. If lockdowns had not been imposed, Covid would have spread even faster without giving the country any time to ramp up healthcare, resulting in 3000-4000 more deaths every day.
• Data-driven inference: That the GDP decline was due to the pandemic and not the economy’s performance before the pandemic is supported by a) the trend / relationship between lockdown intensity and growth rate b) India’s economy showed green shoots before the pandemic.
• Growth rate, intensity of lockdown and deaths: A comparison of lockdown intensity and growth rate of countries across the world reveals a logical inverse relationship. India’s lockdown was the most stringent and hence its growth-rate among the lowest. Growth rate of US and Brazil did not fall as sharply but US and Brazil paid huge human cost by not imposing strict lockdowns. India’s economic policy thus, was a lot more humane and reinforced the principle that GDP can be recovered but human lives lost can’t be regained.
• Green shoots before the pandemic: Green shoots could be seen till February. a) All economic indicators (merchandise exports growth, PMI manufacturing, rail freight volume growth, cement production growth, electricity generation growth, and more) registered positive growth in February after seven months. b) These indicators were climbing upwards since October. c) Purchasing managers index (PMI), which indicates future economic activity, had increased significantly with services PMI registering highest growth by February. It dropped in March. 
• If the pandemic had not happened: Economic indicators suggest that if the pandemic had not happened in March, Q4 2019-20 growth would have been significantly higher. 
• The economy is recovering: High frequency indicators such as PMI manufacturing, eight core sectors, e-way bills, power consumption, passenger vehicle sales, kharif sowing and others are getting back to previous year’s levels. Government’s measures for liquidity, credit, and transfers in the unlock phase are working. 
• Consumer spending: Every crisis increases people’s proclivity to save rather than invest or spend. While previous crises originated from economic factors, this economic crisis originates from a pandemic and requires social distancing and hence the impact on activity and consumer spending has been the most severe. Investment has also suffered. 
• A consideration: Private consumption and investment contribute about 90% of GDP and government spending contributes about 10-12% of GDP in India. 1% decline in consumption and investment requires an increase of 8%-9% in government spending. As the government does what it can do, analysts should keep this arithmetic in mind.
• Summary: Data suggests that decline in India’s Q1 GDP was due to the pandemic and does not relate to the economy’s performance before the pandemic. The economy is recovering in the unlock phase. 

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