'This is not growth; this is de-growth'

'It will be only in fiscal year 2023 when the size of the Indian economy will be bigger than what it was in 2020, you will see demand and employment rising.'

"We lost two years without any growth due to COVID-19," Dr Sunil Kumar Sinha, director and principal economist at the India Ratings agency, tells Rediff.com's Shobha Warrier in the concluding part of a two-part interview.

• Part 1: 'Economy is not growing, it's only recovering'

How long do you think it will take for the wounds in the economy to heal?

The economy had suffered quite a few shocks; some man-made and some natural.

These have given consecutive setbacks to the economy.

De-Mon and GST have severely dented the unorganised and the SME sector, and led to job losses.

The entire approach to GST should have been one of fair amount of hand holding of the businesses, particularly the unorganised and SME sector so that as and when it was rolled out, it caused less disruption and pain.

So, the growth which the economy would have had without these structural changes or Covid, been very different from what we are witnessing right now.

How different would it have been?

I will give you a simple example.

Let us assume at the end of fiscal year 2020, the total size of the economy was Rs 100.

If the GDP growth in fiscal year 2021 declined by say, 8% or 10%, the overall size of the Indian economy would then be less than Rs 100.

If it is 8% decline, it will be Rs 92.

In Rs 92, even if you get a 10% growth, you will add only another 9.2 which means you barely touch 100.

So, in the fiscal year 2022, the size of the economy will only be 100 which was the size in fiscal year 2020!

So, in effect, we lost two years without any growth due to COVID-19.

Had the economy grown at 5% each in 2021 and 2022, then the size of the economy in 2021 would have been 105, and 110 in fiscal year 2022.

But because of Covid, you are going to be just 100 at the end of fiscal year 2022!

Your report says that GDP is expected to contract 7.8% to Rs 134.33 lakh crore in 2020-021, but may grow 9.6% to Rs 147.17 lakh crore in 2021-2022.
You further say that 'the growth numbers suggest a strong V-shaped recovery, leading to the belief that the economy is out of the woods and on the path of a strong recovery.'
What does it mean?

From the bottom that we touched in the first quarter, that is negative 23.9%, we are recovering.

What I am saying is, recovery is there as you are no longer down by 24%, you are only down by 7.5% and probably reach where we were by the end of fiscal year 2020.

The question is, how long will it take for you to recover whatever ground you have lost due to Covid.

You mean, only then we will be able to say we are really recovering?

Exactly. If you look at everything in year-on-year term, it hides the actual situation.

It only gives you the incremental situation.

Because your last position was so bad, even a small recovery looks better.

In such circumstances, it is better not to look at y-o-y growth because a very low base of 2020 will give you a very high growth of 2021.

You cannot feel happy that the economy has grown at 10%, because the fact is, you still have not reached the size that was prevalent before the lockdown.

Your report says the economy may grow at 9.6% in 2021. Can you call it real growth?

In real terms, it is not growth.

It is like, you reach the same size where you were before the lockdown.

So, in real terms, it is not growth.

Because your 2021 was negative, the 9.6% growth looks good.

So, it is not exactly growth, it is just recovery...

Yes, you are only recovering.

That's why I said, you can say you are recovering.

And the recovery is fast. But you can't say you are growing as you are still some distance away from the level where you were when COVID-19 lockdown happened.

Even before the pandemic, the economy was slowing down....

Still, it was growing. Though the GDP did not grow at 6 or 7%, nevertheless, it was growing at 4.2% in fiscal year 2020. It still was growth.

But fiscal year 2021 is going to witness 7.5-8% contraction! This is not growth; this is de-growth.

On top of this, even if you get a growth of 9.6% in fiscal year 2022, you will only reach the level where you were at the end of fiscal year 2020.

Is that why your report says, in annual terms, 2021-2022 will appear to be a good year, but in actual terms, it will only be slightly better than 2019-2020?

Exactly. The economy, though projected to grow 9.6% in the next financial year on year-on-year growth term, it may grow just 1% in real terms to Rs 147.17 lakh crore as against Rs 145.66 lakh crore in 2019-2020.

Your report also says the economy will be able to just recover the lost ground in 2021-2022, and surpass the 2019-2020 GDP level in a meaningful way only in 2022-2023...

Yes. Let us assume that in fiscal year 2020, X number of people were employed, but when the size shrunk in fiscal year 2021, the same number of people could not be employed.

Either there will be a pay cut, or job loss.

So, when you grow at 9.6% in 2022, even when we assume all these people will get their jobs back or full salary, it only means you have reached the level of employment and income in 2022 that is equal to what was in fiscal year 2020.

So, the incremental demand in the economy would still not be there.

It was only recovering the lost ground.

It will only in fiscal year 2023 when the size of the Indian economy will be bigger than what it was in 2020, you will see demand and employment rising.

How much potential does the economy have to grow?

There is something called potential rate of growth and actual rate of growth.

In the Indian context, the potential rate of growth was around 7-7.5%. However, because of various shocks, the actual rate of growth turned out to be much lower.

Now that some structural changes have taken place because of the shocks, the potential rate of growth has come down to 5-5.5%.

What should the finance minister be doing to stimulate demand? We have been hearing the same question for the last few years...

To stimulate demand, the government has to undertake higher expenditure.

The constraining factor for the government is that it is in a very tight fiscal spot for the last several years.

Normally, it is said that the Budget making should be counter-cyclical.

It means when the economy is growing at a reasonable rate, you should bring down the fiscal deficit to a much lower level so that when the economy is in a difficult situation, you have the fiscal space available to increase the fiscal deficit and spend more.

Unfortunately, in the Indian context, fiscal deficit has been higher over the years and there was hardly any fiscal space to stimulate demand.

Is it a catch-22 situation for the government?

Yes, kind of. What is required is to step up expenditure.

In a risk-averse situation, if anything has to be done, it can only be done by the government.

But they do not have the fiscal space to support demand.

That has been the criticism of all the packages announced by the FM till now; that there is very little demand stimulus in the packages.

Most of them addressed only the supply side disruption.

Unless you address both demand and supply, the problem is not going to be solved.

But the RBI has been quite pro-active with the monetary policy.

I don't think there is a magic wand either with the RBI or the government.

Once the mass vaccination takes place and herd immunity is created, most of the economic problems we are facing now, will gradually go away.

So, the answer to the question when will the economy recover, is not in the domain of the FM or the RBI.

Giving fiscal and monetary stimulus can reduce economic pain but the answer to the resumption of normal economic activity and economic growth lies in the domain of medical science.

The situation we are in currently is not created by the economy, neither by the supply side nor by the demand side.

It has been created by a medical emergency.

So, unless and until a solution is found by the medical fraternity, this economic problem will not get solved.