Cover Feature
Plummeting GDP and Booming Stocks : Indian Economy in Coronatimes

Part I

8 August, 2020. A piece of good news greeted Indians in the midst of a morbid milieu marked by growing Corona cases and fatalities and a  palpable economic paralysis. Indian tycoon Mukesh Ambani is at the moment world's fourth richest person. With a total net worth of $80.6 billion, of which he raised more than $20 billion selling a third of Jio shares to investors like Facebook and Google during the lockdown, he is just behind Amazon founder and CEO Jeff Bezos (net worth $187 billion), Microsoft co-founder Bill Gates ($121 billion) and Facebook co-founder and CEO Mark Zuckerberg ($102 billion). And Ambani is not alone - - India Inc as a whole is currently doing quite well on the stock markets. The S&P BSE Sensex is up 45% from its March 23 low, thanks to three months of brisk buying by foreigners plus the rising interest of Indian small investors repulsed by falling FD interest rates. On August 11, Ambani’s Reliance Industries Limited broke into the list of world’s top 100 companies.

30 August, 2020. Newspapers screamed even louder, this time at a rude shocker. During the first quarter (April -June) of financial year 2020-21 i.e., second quarter of calender year 2020, our GDP has shrunk by 23.9%, compared to China’s 3.2 per cent growth (the only major economy to record a positive figure) and the second worst performer UK’s 20.4% decline. But even this figure is a understatement, even if one assumes that a government well-known for its profligacy in data suppression and manipulation has for once told us what it actually found. Because the GDP calculations itself did not fully cover the vast informal sector -- which contributes about 40% of the GDP and which was more severely battered by the lockdown compared to the formal. So the figure of actual decline must have been, in the least, more than 30%, as former Chief Statistician Pronab Sen pointed out in an interview with Karan Thapar.

Worse still, this is not a passing shadow. For FY 2020 - 21 as a whole, GDP shrinkage is likely to be around 13-14%, Professor Sen observed. In fact, following the end- August revelation all rating agencies have revised their forecasts about India's GDP contraction: the Asian Development Bank from 4% to 9% and the CRISIL from 5% to 9%, for example. Goldman Sachs now projects a full-year contraction of 14.8% and data compiled by Bloomberg indicate that while most of the large Asian economies barring China are set to contract this year, India is estimated to shrink the most in that group.

So India currently ranks first in GDP shrinkage and eighth in stock resurgence (both the contraction and the resurgence, it is important to note, are global phenomena). What do we make of these contradictory trends?

"COVID-19 has been likened to an X-ray, revealing fractures in the fragile skeleton of the societies we have built … It is exposing fallacies and falsehoods everywhere- the lie that free markets can deliver health care for all, the fiction that unpaid care work is not work, the delusion that we live in a post-racist world, the myth that we are all in the same boat. Because while we are all floating on the same sea, it’s clear that some of us are in superyachts while others are clinging to the floating debris. We are sometimes told a rising tide of economic growth lifts all boats. But in reality, rising inequality sinks all boats.”

- U.N. Secretary General Antonio Guterres,   
Nelson Mandela Lecture, Johannesburg, 
19 JULY 2020   


The relation between the nose-diving GDP numbers and the skyrocketing Covid graph is understandable. The former is, in part, a function of the prolonged -- and sporadically still continuing -- lockdown(s) arbitrarily imposed on the people and the economy. But how do we correlate the two juxtaposed pointers to the state of Indian economy -- the GDP downturn and the stock market surge? As we shall see, beneath the glaring disconnect lurks a close, even causal relation. With a  long-term stagnation/recession (and now the unprecedented contraction) in the real economy, creating asset price bubbles on the stock markets (and in some other segments) is the basic survival strategy of international finance capital -- a strategy which, incidentally, promotes further concentration of wealth, income and power in the hands of the finance oligarchy ruling the world. What we see today in our country is only a manifestation of this global trend. But that part of the story we shall take up in our forthcoming issue; let us get started with the GDP imbroglio.

GDP in Free Fall: Root Causes and Modi’s Lackadaisical Response

For all the laughable official denials, it is a well-established fact that the downslide had started years ago thanks to despotic and disastrous measures like demonetization and that the process had been steadily gaining acceleration -- much like a stone falling to the earth does. Thus between early 2018 and early 2020, the yearly rate of GDP growth recorded a huge fall from 8.2% to 3.1%. The villain of the piece was unsold inventories signaling stagnant or dwindling demand in almost all sectors of the economy. In fact the finance ministry’s own monthly data repeatedly showed that demand had collapsed, leading to a fall in capacity utilisation and industrial production. Yet the government did not fight the demand-pull downturn by enhancing expenditure on employment generation and measures like cash transfer to the working people. The government did transfer a paltry sum of Rs. 500 per month to Jan-Dhan accounts but only for three months from May and even that never reached a very large section of the would-be beneficiaries, mainly women, due to a faulty and careless delivery system. The scheme was withdrawn precisely when people needed it most. Similarly, a niggardly approach was taken about MGNREGA, with the government refusing to adequately fund the time-tested and highly productive scheme after July. And the migrant labourers -- arguably the worst sufferers of the suddenly imposed lockdown -- were just ignored in the whole scheme of relief.

So what did the government do? It chose to tread the failed beaten track of placating big business with generous sops. Examples include the September 2019 tax cut financed by a massive 1.76 lakh crore snatched from the RBI followed by successive rate cuts by the RBI -- both made possible by appointing a pliant yes-man as Governor -- and so on. Such steps, far from addressing the basic problem of demand depression, in many ways proved counter-productive. The problem of declining tax revenues resulting from the growth slowdown was further aggravated by the tax concessions to big business, thereby reducing the government’s capacity to spend. Many other policy blunders were committed, which showed up in the historical low of 3.1% GDP growth and brought the economy to the edge of a dangerous precipice. This was when Corona happened. In conjunction with the stupid lockdown, it inflicted a double whammy of demand and supply shocks on the economy -- sending it, in fact life itself, into a tailspin.

How did the government respond, in the post-Corona phase, to the twin crises involving public health and national economy? We all know about the absurd predictions, false promises and the inhuman, insensitive, irresponsible conduct of the ‘gharme raho-thali bajao- diya jalao-phool barshao’ government in tackling the pandemic. Its complete failure in flattening the Covid curve could not but contribute enormously to the economic crisis. And what are the measures the government has taken so far in tackling the latter?

The first and most sensational announcement was Modi’s  Atmanirbhar Bharat package of mid-May. In the May-June 2020 number of Liberation (available at we showed that the package, apart from being yet another “statistical jugglery and fraud”on the people, had no potential at all to stimulate recovery or growth.

“Increased state expenditure is the only way out, by adopting measures to increase revenue by taxing the rich and if necessary, by printing money. The government is doing none of it. It is only taking measures to promote private investment, including foreign investment, dismantling labour laws, weakening environmental safeguards and facilitating easier and greater corporate control over natural resources and human labour. Such measures are bound to prove all the more irrelevant and disastrous in times of a massive crisis like the present juncture.”


"Modi's Covid19 Stimulus Package: Monumentally Deceptive and Disastrous"   
- Dipankar Bhattacharya  


Now the RBI itself, in its report of August 25, admits that "appetite for investment is anaemic". And yet its policy responses remain exclusively focused on releasing more funds to commercial banks by reducing the cash reserve ratio (CRR, or the percentage of total deposits that a bank is required to maintain as a cash reserve with the country’s central bank) and/or the repo rate (the rate at which the central bank lends money to commercial banks). The banks are expected to pass on the benefits of lower CRR and repo rates to their customers, i.e., lend at lower rates of interest. This would, it is assumed, encourage both investment and personal consumption, thereby stimulating the economy. But in the absence of a good “appetite”both for investment (since markets remain depressed) and for personal consumption (because, anxious about the uncertain future, the aam admi tend not to borrow for buying homes or consumer durables) the banks do not find enough customers willing to borrow even at the reduced rates of interest. Moreover, the banks themselves, in view of the grim economic situation and having burnt their fingers on NPAs, are now extremely cautious about lending. So the excess liquidity generated by our wise policy makers are ending up in RBI's own reverse repo account (where banks keep their excess funds at a low interest) or in speculative activities on the stock market (more about that in Part II).

This in brief is why the Indian economy is not looking up even after“Unlock 4.0”. How can heavy doses of the wrong medicine -- liquidity infusion -- save the economy when it is in dire need of a very different remedy, namely, demand generation? In fact the situation would have been worse if it were not for the good rabi harvest and very good monsoon, which provided some respite in agriculture. The recently published annual report of the RBI has admitted that the‘green shoots’that were visible in May and June started disappearing from July, mainly because pent up demand had got exhausted. It is now widely recognized that the recent pickup in a few sectors like automobiles resulted from pent-up demand; by no means did it signal the onset of a much-hyped V-shaped recovery. In fact economists and commentators are now looking for novel imageries to describe what India could expect next year: a hockey stick recovery (where a very long downturn is followed by a tiny uptick) or a K-shaped recovery (where one branch or segment of the economy goes up and another, equally substantial one, goes down).

What Can Still be Done and Must be Done

The government has failed the people, but a lot can still be done to save lives and livelihood, to save the economy, to save India.

Eminent heterodox economists and also those familiar with the workings of global capital as well as the Indian economy - - such as Raghuram Rajan and Kaushik Basu - - have come forward with their valuable opinions. In an interview with Karan Thapar for The Wire, Rajan explained why the government must take urgent relief measures for the bed-ridden economy and suggested how the finance ministry could do this without inviting too much reactions from the global capital markets (see box).

In light of the points that emerged in course of our discussion, we would like to pinpoint four basic and urgent tasks to be carried out on a war footing.

1. Develop our public health infrastructure in a manner that the huge loss and depreciation of human resources (which also constitute the most vital component of a nation's economic resources) due to the pandemic can be minimised quickly and significantly. Many countries are now witnessing a second wave of Covid-19; our public health services must be kept battle- ready for any such eventuality.

India's 23.9% GDP contraction should alarm us all

“... Government-provided relief becomes all the more important. This has been meagre; primarily free food grains to poor households; and credit guarantees to banks for lending to small and medium (SMEs) firms, where the take down has been patchy. The government's reluctance to do more today seems partly because it wants to conserve resources for a possible future stimulus This strategy is self-defeating.

If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up... Similarly, without relief, small and medium firms — think of a small restaurant — stop paying workers, let debt pile up, or close permanently. Essentially, the patient atrophies, so by the terse the disease is contained, the patient has become a shell of herself.”


2. But this must not be done simply by overworking the available health staff and thereby depriving lakhs of people suffering from other ailments. New infrastructure, including medical staff and equipment, must be built up/ mobilized. The handsome expenditure on public health should be recognised for what it actually is - - a stimulus for urgent economic recovery and an investment in the future progress of the country, both in terms of human development index and economic progress.

3. Revamp and extend the scope of MNREGA, launch its urban edition.  While continuing other benefit transfers, restart and firm up cash  transfer, for that alone can boost effective demand. Start filling up the lakhs of vacant posts in government and semi-government undertakings and institutions, including educational institutions, on a urgent basis. Meet the long standing demand of unemployment allowance and introduce an Indian version of the JR (job retention) scheme of OECD countries.

4. Compensate the migrant labourers, who suffered and died due to the criminal unconcern of the central government, with cash and jobs. Launch special schemes to address specific problems of women, Dalits, Adivasis, Minorities and all other socially/ economically deprived and vulnerable sections; and also for students and youth, on whom depends the future of our country.

But whence will all the money come? Apart from means like a special levy on the super rich and raising funds on sovereign bonds, money should be printed as required. The government must rise above the neoliberal taboo about deficit financing. When you refuse to take absolutely necessary steps in an unprecedented crisis for fear of a fiscal deficit, the economy collapses, GDP shrinks more and more, ultimately you are forced into deficit financing. This is the worst case scenario -- experienced in many countries -- where the nation loses out on both counts. With a huge deficit, the nation is caught in a debt trap with zero or negative growth and skyrocketing inflation. The other option is to increase government expenditure on relief, reconstruction and employment generation in a balanced, well thought - out manner and accept some fiscal deficit. That way, the deficit will increase for a while, but not in an uncontrollable way and recovery will begin. Once GDP enters the positive territory and stays there, the deficit will start coming down.

We know the government is in no mood to listen to the people's voice. We shall have to force its hand through mass movements. And the green shoots of multiple agitations across the land are indication enough that the people of India must not be taken for granted.

(To be concluded)   

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