More Tricks than Treats: Navigating a season of confusing data around the Indian Economy

In its November 2020 Monthly Bulletin, the Reserve Bank of India has a ‘nowcast’ on the Indian Economy which predicts a contraction of 8.6 % in the Indian economy during the second quarter of our 2020-21 fiscal year. This figure, as widely reported, becomes important because it indicates that the Indian Economy has entered into a ‘recession’ phase for the first time in its history. While we should be certainly worried about what this sort of data might bode for the Indian economy in the short term, we must be very careful to interpret any data in this regard with a mix of caution and context.

First of all we must be wary of how differently the MOSPI and the CSO in India report their headline growth numbers for the economy each quarter, from other major economies in the world. This difference was the source of much confusion and policy headspace which engulfed Indian media and social media around July-August. Most major economies in the world report their growth numbers at a quarterly level with a Quarter-on-Quarter basis (measuring the growth of the economy in the current quarter as compared to the previous one). The MOSPI however reports quarterly GDP growth estimates on a Year-on-Year basis for every quarter i.e. comparing the GDP of the quarter in question (2020 July – September), with the GDP of the same quarter from the previous financial year (2019 July – September). India’s economy contracted by 23.9% in the April-June quarter if we take a Y-o-Y measure, and by 25.9% the same quarter if we shift the barometer of analysis to a Q-o-Q measure. Hence any headline number which might be released by the Government will compare our level of economic activity in July-September, 2020 versus the same period in 2019.

The distinction between these two metrics can be clearly seen in the figure below which tracks India’s quarterly growth data based on the two metrices mentioned in the previous paragraph.  We see the data showing significant level of divergence based on the unit of reportage that we might want to consider. We see that the quarterly growth rates compared to the previous year’s GDP always remain above the estimates which take the previous quarter as the baseline. Under such circumstances the figure of -8.6 % becomes key, subject to interpretation.

From a quarterly perspective, a more gradual normalization of economic activity will inevitably show sharp economic growth rates as compared to the previous quarter. The dramatic contraction of 25% which India saw between April and June was a combination of the lockdown along with the declining growth rates of the country pre-COVID. The quarterly growth data for both G20 and major emerging market economies indicates significant decline in GDP growth in the second quarter of 2020. India has been no exception to this trend with one of the most stringent and longest lockdowns instituted. The Indian economy saw a 70 day nationwide lockdown which wiped almost a fourth of total economic activity from the previous quarter making it one of the worst performers among major economies for the second quarter of the 2020 calendar year.

Therefore when we are looking at data for the next quarter, where the level of economic activity slowly began to head back to more normal levels, we would expect to see a sharp jump in quarterly growth rates, and ensuing celebration of India’s “fiscal stimulus” measures. This sharp jump can range anywhere between 9% to 15% compared to the April-June quarter (where we had an ongoing lockdown) which would be historic in its own right as the highest quarterly growth rates recorded in the history of the country (even compared to our periods of 8–9% annual growth), while only capturing a rebound effect of an economy finding its feet after such a massive lockdown. A similar phenomenon is occuring across the world with countries in stringent lockdowns for a majority of the April-June period such as France, Spain, Italy, Portugal and UK all being poised to record extremely high growth rates this quarter.

The more conventional reportage of the MOSPI where the -8.6% figure might come from would indicate that while the economy is recovering, it is still some time off before we might reach pre-pandemic levels of economic activity and growth. This figure would indicate that we have shrunk by almost 9% compared to a similar time last year, despite making considerable strides toward normalization in the last three months compared to the lockdown phase. While Y-o-Y reporting can tend to push quarterly growth metrics in the upward direction, we can see the same phenomenon playing out in the reverse direction in the aftermath of a global pandemic and a stringent lockdown .

Almost surely, every media house article will be aimed at the question of whether India is in a recession. The commonplace discourse is already setting in that India has set into a “technical recession”. While the entire world contemplates the alphabetical shape of the recovery path taken by different economies, we grapple with the question of whether this period of significant economic downturn is a recession and if yes, how does this compare with other recessionary episodes in history.

For that we must address the elephant in the room: what characterizes a “recession”? The simple answer is that there is no universally accepted technical definition to a recession, except for characterizing it as a decline in economic activity that lasts more than a few months. The National Bureau of Economic Research (NBER) in the United States has a committee of economists dedicated to tracking Business Cycles in the United States who classify periods as recessionary based on a gamut of macroeconomic indicators. Meanwhile, across the Atlantic, the United Kingdom and the Eurozone adopt the two quarter rule i.e. a two-quarter consecutive contraction in economic activity is classified as a recession. This degree of subjectivity has led us to see different phases in some of the largest economies in the world based on quarterly growth data, specially in the last decade and a half.

The pandemic has led to much sharper declines in economic activity than any other financial crisis on record with a precipitous drop in not just global production activity but also major trade in goods for a significant period of time in the past calendar year. The World Bank has already pointed out that this year is poised to oversee the deepest contraction in economic activity — 5.2% — since the Second World War, with the IMF projecting output losses of approximately 28 trillion USD. All the evidence at the global level points to a global economic recession.

How do we then perceive the question of whether or not India is in a “technical recession” or not? On the basis of any subjective and broad-based analysis of the economy, the pace and magnitude of the decline in economic activity clearly points to the fact that the economy is/has been in a recession since March. The extent of the drop in levels of activity and the magnitude of output that might potentially be lost in such a short time points to the existence of a deep recession, coexisting with what is going in the rest of the global economy.

However our numbers will probably not pass the two quarter test in terms of classifying a technical recession, simply because the restarting of such a large economy by India should push growth activity from the previous quarter only back up. The instances of any economy following a contraction of 24% with another quarter of negative growth are almost unheard of and would only indicate that the economy is literally in a state of free-fall. This can be imagined in the context of the growth data from many of the Euro Area economies (such as Greece, Italy, Portugal) which were said to be in technical recessionary phases (recording more than 2 quarters of contraction) during the last decade, as part of the Eurozone crisis — recording extremely now but negative growth rates for multiple quarters on end.

Does this mean that everything is hunky dory in the Indian context? Absolutely not. The ability of the government return to the pre-pandemic levels will still depend largely on a sound policy mix and sustained large injections of purchasing power on the consumer side, and incentives on the producers’ side to keep many ailing industries afloat. These are precisely the indices that we need to keep our eye on, in the short run to understand how different parts of the economy are reacting to the lifting of the lockdown and the pandemic in general.

Our best way to understand how the economy is performing in navigating its way out of the current recession is to look at higher frequency data around other conventional indicators of the level of economic activity. Our barometer of judgement in the short run has to be the pace of recovery to pre-Pandemic levels of activity and the robustness of this recovery, rather than currently looking at more medium term measures of recovery and growth, which are important yet parallel goalposts of understanding the economy.

Indices like the Index of Industrial Production and the Purchasing Managers’ Index on a monthly frequency give us much better insights into tracking the path taken by different sectors of the economy in the post-Lockdown period. Both indices tell us that there has been an expected pick up in economic activity and industrial production in India post the gradual lifting of the lockdown beginning June. This rebound is only natural. It does not indicate a flourishing economy but only that activity has resumed since June.

A lot of economists and policymakers also gauge the pace of economic activity through indicators of domestic freight traffic to get a sense of the level of commerce in the country. We see that both railway freight and airline cargo has taken a sharp rebound post the lifting of the lockdown in the economy, and while they are nowhere close to their pre-covid peaks, along with IIP data also seem to indicate that the economy has been modestly moving back to normal pace.

On the consumer side, the decline in the sentiment among the people in the economy however points to the absence of many demand side measures being taken by the government which would instil some degree of confidence amongst the ordinary consumers in the economy. We see that the sentiment of the consumers around the current situation of the economy has only been worsening with some hope of an improvement in the future. On a higher frequency, this index would do a much better job at a monthly level in terms of capturing the prevailing mood in the economy and how the overall situation is being perceived by the consumers.

The Indian economy, like the rest of the world, is not yet out of the cinderblocks when it comes to the pandemic and the recession it has created. The entire world along with India was facing a period of slower growth in the past couple of years, with the pandemic having pushed this process over the edge. The discourse around a “technical recession” is something that can be avoided for a couple of reasons: We are already in an unprecedented recession of this type for the first time in our history, and our economy doesn’t qualify for the 2 quarter recession rule which is applicable to more conventional economic slowdowns and not to a global pandemic.

While the structural reforms that the Government might be trying to bring about are aimed at making sure the recovery is of the right mix in the longer term, the economy has been in a recession for a majority of the year in terms of the quantum of output and jobs that have already been lost, and are potentially to be lost in the future. However, quarterly growth data might not always be the best way to assess the performance of our economy this year or the next. Any headline number around the economy during this period might mask the true extent of recovery that the economy has undergone. Looking at a mix of high frequency indicators as shown above gives us a more nuanced picture in terms of the pace of recovery on a monthly level, and show that normalization is on it’s way. The worry about normalization however is that normal economic activity pre-COVID was extremely worry-some for India with declining growth rates for 6–7 successive quarters.

[This post is also published on Medium under the same name]

Category: Pandemic | Published on: December 15, 2021