The slowdown in 2019-20 was neither anomalous, nor inexplicable

It is important to remember that growth had been slowing for five consecutive quarters before 2019-20

Economists love to find trends or anomalies, and the more debatable they are, the better. The latest one doing the rounds is the idea that the anaemic 4 per cent GDP growth in 2019-20 was somehow unexpected, unprecedented, and deviating from the trend, which was of much higher growth. 

A working paper by Poonam Gupta and Abhinav Tyagi of the NCAER says 2019-20 was an exception. They say the “deep and anomalous economic slowdown in 2019-20” was anomalous because growth in 2019-20 was a lot slower than in the previous years.

To quote: “Notwithstanding the prevailing alternative narratives, the slowdown in the economy did not permeate to each sector and each activity. It was concentrated primarily in the manufacturing sector. The agriculture sector grew faster than before, and the services sector experienced only a mild deceleration in the latter half of the year. On the demand side, the slowdown was primarily reflected in a sharp contraction in exports and some moderation in consumption. Investments and government expenditures were largely undented.”

“We attribute the slowdown to the following three factors: (i) About a 50 basis points worth of slowdown to the COVID-induced lockdown in the last week of March; (ii) More than 100 basis points worth of slowdown to the collapse in exports, which was both due to a large global slowdown in trade, and due to the fact that India lost out to other countries in maintaining its market share in a slowing market; and (iii) Credit collapse from banks, NBFCs, and HFCs, due to issues related to asset quality and risk aversion, which likely made credit availability an impediment to production, investment, export, and consumption decisions.” 

It is important to remember, however, that growth had been slowing for five consecutive quarters before 2019-20, after all, and a series of policy decisions served to make a bad situation worse. 

The one major factor that couldn’t entirely be attributed to the government was the 100 basis points worth of slowdown caused by the slowdown in global trade over the year. However, as the NCAER paper itself acknowledges, a part of this

was because India lost market share to other countries in terms of exports. 

This was simply because India was not competitive enough which was a policy failure.

Another major reason was the collapse in credit delivery by the entire banking sector—including banks, NBFCs, and even housing finance companies. This had wide-spread knock-on effects, slowing every aspect of the economy: investment, consumption, production, and exports. 

The IL&FS collapse led to a sharp fall in NBFC credit, which could have been mitigated had the RBI moved with greater alacrity and had made adequate liquidity provisions. 

The third policy decision—not really a failure—was the COVID-induced lockdown in the last week of the 2019-20 financial year. While a complete cessation of all economic activity for just a week wouldn’t have had a major impact on the entire year’s performance, the impact would still have been noteworthy.

My point is this: the slowdown in 2019-20 was neither anomalous nor inexplicable. There are two other major policy measures that also likely had a major impact on the economy.

The first, unsurprisingly, was demonetisation in November 2016 which was exacerbated by the utterly flawed implementation of the Goods and Services Tax the next year. The initial confusion surrounding the new tax system encouraged people to try to circumvent the system by shifting to the informal economy—which was now a lot harder to do because of the new focus on a less-cash economy.

The end result was a precipitous fall in investor and business confidence that still hasn’t properly gone, pandemic notwithstanding.

One final point. The paper ignores the Fallacy of Composition which says that what is true of some of the parts is not  necessarily true of the whole.