Sometime back, Debashis Basu, the editor of
Moneylife, made an important observation in his column
“Irrational Choices” on economist obsession with forecasts and how they have been off the mark most of the times. Tracing the doomsday predictions after the COVID-9 lock-down, he points out that many of the capital goods industries such as cement, chemicals and packaging have declared far better results in second quarter (Q2). There was an attempt to resolve the apparent paradox—extremely good sector performance against the backdrop of overall pessimistic prediction—by looking into the theory of complex systems and how they behave.
It was a search in the right direction. But systems view of the economy is still to penetrate the ordinary discourse; as a result, the damage caused by the COVID-19 lock-down is still to be assessed in the right perspective.
How a pandemic spread, affecting the system and its constituent parts, is largely not documented even in policy circles. Hence, what appears as a positive sign is not always positive from a systems perspective. The policy prescription missed this aspect of the complex system, but has tried to salvage the situation through bilateral fixes, disregarding the overall systemic perspective following the lockdown.
With the availability of the so-called high frequency indicators (HFI), the temptations to produce forecasts have increased by leaps and bounds. The recent "State of the Economy" paper published in the RBI Bulletin of November 2020 is a good example of how HFI can be used. The assessment is quite balanced but with its share of problematic conclusions.
The most glaring one was in the very first paragraph: “expenses of these companies, however, fell faster than sales in the quarter ending September 2020, resulting in a sharp rise in operating profits after two consecutive quarters of contraction. With other income increasing moderately, net profits rose strongly, mirroring the behaviour of operating profits, which suggests that gross value added by the corporate sector in Q2 may surprise on the upside.”
This one example shows that standard logic ‘high growth in value added is good’ should not be applied this time. This is because it ignores the distributional consequences of the pandemic. The higher values added were achieved by reducing expenses which include layoff, loan moratorium, and loss of intermediate demand which constitute 51% of the total output, and even labour-saving technology substitution.
Another example includes celebrating the positive current account deficit on the back of higher import contraction vis-à-vis exports. It is hardly appreciated that RBI uses imports as the indicators of investment demand which has collapsed. The surge in the goods and services (GST) collection is another example overlooking the fact that it has increased on the back of a cascading effect of higher fuel prices on a narrower tax base as indicated by a reduction in the share of private consumption to the gross domestic product (GDP) by 200bps (basis points) vis-à-vis the situation before the lock-down.
The same pitfall is now before us in the Q2 GDP figures which estimate -7.5% growth rate; not to mention that all forecasts are again wrong! Those oblivious of the above are amazed at the manufacturing growth of 0.6% in Q2 but fail to see the distributional impact of output loss, intermediate demand contraction, idle capacity and concentration of economic risk in the banking system.
But the larger question must be addressed. Is there any paradox? Does this collection of positive figures show revival?
One can also borrow from the seminal work of Nassim Taleb, the concept of fragile and the anti-fragile (things that gain from disorder). The sectors that benefited from the COVID-19 lock-down were the anti-fragile; they were bound to give a positive lift to the GDP. But the share of the anti-fragile sectors is much smaller than those of the fragile. Since the anti-fragile benefit from chaos, they tend to create inequality. The sectors that have been anti-fragile include pharma, chemicals, IT services. With expanded state power even the government is anti-fragile as rent seeking becomes rampant.
The concept of resilience from the disaster management literature is the ability of a sector to adjust to sudden change in demand, supply and output shock. It measures the ability of the firm to adjust production or supply in response to the external shock. Different sectors have different resilience. Thus, we can imagine a bi-variate grid consisting of fragile and anti-fragile sectors grouped by their reliance. Those which are less resilient and fragile are the ones that need policy support. This is a possible strategy to revive growth and understand the complex system in the right perspective.
The conclusion is that the current state of the economy continues to be worrying and the -7.5% growth is not something to celebrate. The sharp reversal in value added needs much granular inspection and may even entail a higher equilibrium level of unemployment if the same is achieved by technology substitution and permanent loss of output. The current state of the economy is best described by stagnation and inflation and unless policy course corrects its supply-side fixes to demand-side issues, the situation will not improve much.
(The author is an economist in the banking system. The views are personal)
