“Which is the highest mountain on Earth above the sea level?” —- certainly, the answer to this question is known to all – Mt. Everest, 8,848 metres high. Let’s ask a question of similar genre, however not so cinematically famous as the former. “What is the deepest oceanic trench on earth?” — a lot of people know the answer, yet I came across many that don’t. It is the Mariana Trench, located in western Pacific Ocean, with a depth of 10,948 metres (good enough to engulf Mt. Everest upside down and yet be left with ample ‘leg space’). Now, as you read this, you might think how poignant these high school geography facts are for an article titled with GDP – the Gross Domestic Product. Well, let’s take a moment to appreciate the new “Mariana Trench” of GDP growth rate that we have hit in the April-June quarter of the current financial year. -23.9 per cent, it is (and it’s a minus not hyphen, just in case!). Besides, the ‘popularity’ of the current GDP trend is going to depict a reverse phenomenon. People will easily recall this ‘Mariana Trench’, unlike the original one. While asking people about the highest GDP growth rate achieved till date, one might come across varied numbers, what so ever strikes their whimsical chord at that point would be pooped out. So, we have gravitated to the new low.
As we move ahead, some questions ought to be answered. GDP, in recent years, has been supposedly one of the most commonly used and coveted words, and I might as well dare to add, the most misunderstood or maliciously misrepresented word. People in general, claim that they have nothing to do with the GDP trend as long as they get what they desire. We are getting our food, we have a shelter, proper medical facilities, so why should we put our fingers on GDP. The Gross Domestic Product (GDP) comprises of Consumption (C), Government Expenditure (G), Investment (I) and Net Export (X), to describe in a very lucid way. When the GDP depicts an upward trend, all these factors contribute positively, while the opposite holds for a downward trend. Now, the question is that why should one care about GDP, even though we are ostensibly blessed with all that we wish to possess. Let’s consider an economy to be a factory which manufactures Indian Toys. In the past two quarters, the factory has been able to manufacture 1,000 and 950 units of toys, respectively. In this quarter, the number of toys that need to be produced has been forecasted at a mere 750 units. At the end of this quarter, it is seen that the number of units actually produced is 650 units. Now, the same industry, which has a capacity to produce 1,000 units, is actually producing 650. It is performing at a much lower capacity. The machinery and labour units that the factory was formerly using at full capacity are no more in use now. What strikes at this point is unemployment. Now the fact that the demand in the economy is itself very low, the factory will refrain itself from investing any further in next quarter, where it was already on a spree to layoff people. An attenuation in the private investment holds back income generation. With people being initially unemployed, and no income being generated, the next axe will be on the level of consumption and eventually, savings. In economics, this is termed as a ‘vicious cycle’, where a lack of investment is the cause and the consequence of its own. Hence, I and C, the two of the four components of GDP, have already started drifting downwards. If the economy itself can’t produce enough to feed its consumers, it is bizarre to assume that it would cater the global crowd. If we import significantly more than what we export, or if the export falls, the net export factor (X) is ought to be pushed off the cliff. The only card left in this situation is G- the government expenditure. Fiscal stimulus, in the form of higher government expenditure, is ought to happen to revive the economy. Else, if the trend goes on, more and more people will run out of their jobs, and the people that have not been affected yet, will also be affected gradually. The impact will trickle ‘up’ to the privileged class over the period of time. The irony of an economy is that in-dependency is a myth. If one sector falls, others will follow the suit because a producer of one commodity is a consumer of all other commodities. Hence the cobweb. Hence, growth is important for everyone to get pulled in.
With a robust example and metaphors across the table being set previously, let’s take a dig at the real-life situation. The months of April – June 2020 have been insanely hit, majorly because of the lockdown in response to the unprecedented COVID-19 pandemic. Economic activities ceasing down, drying up of the supply chain, and skyrocketing unemployment, have all been happening concurrently in this phase. The zenith of this fallout was expected to take a hit when it was realised that the government expenditure is not being channelised in the way it should have been. The pandemic has primarily hit the demand side. Just creating or trying to revive the supply side will not match the sternness of the problem. Classical economics theory, the Say’s Law, which claims that supply creates its own demand, is not applicable in this scenario. With no new jobs being created, MSMEs shutting down one after the another, it is imperative to have the needed fiscal boost to revive both the supply side as well the demand side, something that has been severely missing during this entire period. Skilled and unskilled labourers that have lost their job in the pandemic need a strong support by the government. If that doesn’t happen, even more serious economic problems are loitering around to ring the doorbell. With the industries shutting down, banks getting more and more risk averse, and government expenditure not happening satisfactorily, it would be a bitter truth to say that this is just the tip of the iceberg, while the apogee is yet to hit us hard.
The amount of money that the government has proposed to be transferred to the primarily distorted, victimised and marginalised strata is certainly not enough to pull the grains in one household. More funding should be done to develop an infrastructure that would create jobs as well as serve developmental purposes. MGNREGA should be treated as a pipeline to pump the rural sector and more funding should be channelised for the scheme. An increase in the amount received under the ‘unemployment benefit’ in the current scenario, and then eventually cutting it back post the pandemic to disincentivise people relying on it, can also do a bit in this situation. Government should also release funds for the respective beneficiaries which will act as cushion to rely on amidst this outbreak. Students that deserve scholarships must be given the amount without any further delay, since any additional money in the hands of people today will be a boon for the economy. EMIs on personal bank loans could have also been waived off, that is paid by the government to lending institution, for six months in lieu of the moratorium announced by the government. Moratorium involves deferring the payment of EMIs and it will eventually ask the borrower to pay more, since EMI is the sum of principal standing interest, and the interest not being paid now would mean a loan to be repaid for a longer period of time, eventually leading to a piled-up pressure on the middle class. This huge pandemic outbreak, since first of its type, has challenged or can challenge any sort of prescription, yet these are the minimal things that ought to be done.
After all of this rambling and rants, though hard but it should be claimed that this too shall pass. Though I am sceptic regarding the path of recovery, whether it would be V, W or K-shaped, but if this way of dealing the situation continues, my vote goes for the letter O. Besides, for people who could not have cared less for the GDP, let’s hope that they never have to get bothered by this, because god forbid if this at some point starts trickling them too, the situation would already be out of hands and maybe, beyond repair.
A -23.9% growth rate seems tantamount to the situation where although we did take part in the relay of GDP growth rate, our runners are running in the opposite direction with a wrong baton in their hand. Anything worse than this would essentially look like a minimum requirement pass marks in Economics, contingent it being taken in a positive or mathematically absolute term. But as of now it is extremely hard to point out anything positive happening, except that we are left with two options, first, a celebrated nomenclature convention to interchange the name of the COVID-19 graph with the GDP growth curve, or, second, to solace our heart that it was the wrong curve that was pulled down in its grave, maybe be better luck next time!
Sushobhan Paul is a staunch advocate for amalgamated fiscal and monetary policy.
He perceives economics to be ubiquitous and believes that almost everything can be defined by economics. He is currently a research scholar in Financial Management at Shiv Nadar University, Greater Noida. He completed his bachelors in economics from the University of Calcutta and holds a masters degree in Economics from Jawaharlal Nehru University, New Delhi. He is exuberant regarding any pragmatic discussion on economics, psychology, politics or maybe anything that goes with logic.