Debate around the Growth of the Indian Economy!

Few weeks ago, the GDP numbers for the 1st quarter of this fiscal year for India were published. As per that, the Indian economy grew by 20.1%. In the following days, there were columns, Op-Eds and Social media commentary on whether it was a good quarter or not. Since “Neutral media” is an Oxymoron, depending upon the leanings of the media, the economic performance was either branded “historic” or “pathetic”. There are no surprises here and we have now learnt to live with the media spin on all issues.

Along with the media, the tribe of “Neutral Economists” is also on the wane.  Depending upon their political affiliation, the first quarter performance was touted to be “record breaking/highest ever” or “worst/shocking” in decades by reputed economists.  Therefore for an Aam Admi, it is difficult to judge what actually the situation is. And the truth as in many situations may be somewhere in between.

I am no economist but as an ardent follower of the Indian economy, I tried to make sense of the numbers and the trends thereof and this is what I find. I would like to hear the opinion of the readers as well on my hypothesis.

In isolation, a GDP growth of 20.1% is of course very good. But, we should not forget that this is at the back of a low base of -24.4% same Quarter last year. In that sense, some of the commentary from pro Government circles that this growth is massive and is earth shattering etc. is immature.  At the same time, commentary from the opposition side comparing this with GDP rate pre-Covid and claiming that actually it is lower than what it was two years ago is equally immature. And this is why.

First, the reality is, on a trend line after a massive negative growth of 24.4% in Q1 last year and growing marginally by 1.6% in Q4, a growth of 20.1 in Q1 this year shows that the economy is indeed recovering and the recovery is V-shaped to be precise. This is certainly to be happy about.

Second, we must keep in mind that during Q1 this year, we got caught by a massive second wave which again put several curbs on the functioning of the economy, which was as such firing at much lower levels than before. So, among the eight buckets which contribute to the GDP namely Manufacturing, Construction, Agriculture/forestry & fishing, Mining & Quarrying, Electricity/Gas/ Water & other utilities, Trade/Hotels/Travel & Communication, Finance & Real Estate and Public administration, Defence & other services, it is obvious that a couple of engines are not firing at all. It is therefore natural that when you compare with the pre-Covid situation, the GDP in absolute numbers will be lower. This however does not take away the fact that with the easing of restrictions, the economy is obviously recovering.

Third, let us take a look at the monthly GST collection numbers for the past couple of years.  The average monthly GST collection figure in 2018-19 was Rs. 98,114 Cr. and the average in the 1st four months of 2021-22 is Rs.113,333 Cr. 2018-19 was pre-Covid, normal times and these four months are right in the midst of Covid. And compared to Rs. 101,818 Cr. monthly average last year. So just a cursory glance shows that the economy is on the mend clearly this year.

Here, I would like to dwell into a larger point and thereafter a question.

I would presume that GST collections represent transactional activity in the economy with respect to both goods and services. We are all aware that post the pandemic all “Contact” based sectors have been severely affected. This includes the likes of Travel, hospitality, Wining and Dining (all these for business and pleasure), impulse shopping, recreation and entertainment of all sorts and other human touch related services (salons, spas…). While the Software industry per se has not got affected due to Covid with “Work from Home” filling in well, the ecosystem around it has been significantly disrupted. This includes transportation, catering, real estate, utilities, other discretionary spending and stuff.

As common public, our shopping is mostly restricted to what is required. We travel only when it is utmost required.  The “Festival economy” which is big in India has been crippled since last April.  So my question is, when transactions around goods and services have been curtailed, how is it that the monthly GST collections have shown a growth over 2018-19? (Pre-pandemic period)

There are can be two inferences from this trend:

First, if the monthly GST collection is showing such a robust 15% growth (over 2018-19) even during the pandemic times, once we are done with the pandemic and when all the cylinders start firing, we are looking at an exponential growth in monthly GST collection figures. (Even adjusting for inflation)

Second take away is, either with whatever limited avenues left to us, we are consuming much more than average or there is a significant shift towards formalisation of the economy. I would like to believe in the latter. I don’t think we are consuming more than what is required. However, certainly our purchasing patterns have changed. Due to the pandemic imposed curbs, it is possible that our dependence on the neighbourhood mom and pop stores have come down and we have got used to the convenience of door delivery for everything.

As a personal example, pre-Covid, we used to buy vegetables and fruits from our neighbourhood bhaiya. Once lock down struck, this shifted to a vegetable vendor who was arranged by our apartment complex for door delivery. Here, payment was through G-pay/PayTm etc. Now in the past few weeks, the same vendor is now part of an E-Commerce aggregator called Bhajiwala.com! Bhajiwala.com, I am sure is within the ambit of GST and hence clearly part of the formal economy! My view therefore is, the benefits of GST implementation which we were all looking forward to is beginning to accrue and will be more visible when we are out of the pandemic.

It was widely believed that once GST is implemented, it will add 1-2% to the annual GDP. I now believe that once the pandemic is over and when economy starts firing in all cylinders like before, the bump due to GST could be in excess of 2% because of the increased formalisation of the economy is the last 2/3 years. This I am talking about even after the pent up demand effect.  That should put the naysayers of the GST to rest.

Though we cannot take the stock markets as a real indicator of the state of the economy thanks to its fickle and speculative nature, probably the markets are seeing into the future as above which others are not.  Which is why the markets have been on fire since the last few months even in the midst of the pandemic.

In conclusion, I would like to say that yes, the high growth in Q1 is due to the low base effect.  Yet, it is a significant milestone and pointer towards a robust economic recovery. It is certainly one to be cheered upon if not celebrated upon as yet.  Acche Din are around the corner!

Pic Courtesy: The Economic Times