GDP is not just a number

- September 14, 2020
| By : Vivek Kaul |

When the economy contracts by nearly a fourth, it’s bound to affect all our lives, one way or another. We just may not be aware of it India first declared its quarterly gross domestic product, or GDP, figures for the period April to June 1996. GDP is a measure of the economic size of a […]

When the economy contracts by nearly a fourth, it’s bound to affect all our lives, one way or another. We just may not be aware of it

India first declared its quarterly gross domestic product, or GDP, figures for the period April to June 1996. GDP is a measure of the economic size of a country. Between 1996 and March 2020, India’s GDP never contracted in comparison with the same period in the previous year.

But, as they say, there is always a first time.

India’s GDP for the period April to June 2020 contracted by 23.9 percent. But even this could be an underestimate. There are two reasons for this. One is that the real state of the huge informal sector in the country is captured only over a period of time, as more and more data comes in, and not immediately (which is why it is called informal in the first place).

Further, the data for the smaller, unlisted businesses also comes in over a period of time. The informal sector and small businesses have been hit the hardest by the coronavirus pandemic. Once this is accounted for, the chances of the GDP figure being revised downward are pretty high. And this would mean an even bigger contraction than 23.9 percent.

Dear reader, you might be wondering by now that all this is fine, but why should I be worried when it does not really impact me. At least, not in any direct way. Well, my job is safe. My earnings haven’t been impacted. I haven’t defaulted on any loans. I have paid my taxes on time. My life goes on as it was.

Here’s the thing. When the economy contracts by nearly a fourth, it is bound to impact all our lives, one way or another. We just may not be aware of it. Let’s take a look at this pointwise.

  1. One thing that is clearly happening is that many companies are encouraging their employees to work from home. They have discovered that this way they can make them work longer (of course, no HR professional is going to admit to this). This has an impact on those working in the informal services sector.

With no need to drive to work, people will no longer want to employ drivers. Hence, jobs will be lost. This is already happening. Over and above this, the demand for app-based cabs will go down. This will mean a further loss of economic activity.

The small eating joints around and outside many Indian corporate parks that sell good food at attractive prices will continue to lose out on business. There is a grave danger of these joints having to simply shut down. Hence, coronavirus will end up destroying Pakodanomics as well.

  1. With people having to work from home, there will have to be a basic redesign of a few things. They will need more ergonomically designed furniture. Now if you are in the furniture business, have you thought of this possibility? And if you have, what are you doing about it?

Further, it might even need a possible redesign of how homes have been laid out up until now. Home wear is now selling more than formal wear and so are chappals. These are business opportunities.

  1. The moratorium on repayment of loans taken from banks and non-banking finance companies got over as of August 31. Hence, individuals and businesses will have to get back to repaying their loans, unless the bank agrees to restructure it. Let’s say you run a business and are dealing with another business (possibly as a supplier or a customer) that is in a financially stretched situation right now. The owner of the business might simply decide to shut down. If he is a supplier to your business then you need to look for a new supplier. If he is a customer then he might default on what he owes your business as well. These are possibilities that you need to look out for.
  2. While the economy on the whole contracted by 23.9 percent, consumption as a whole contracted by 26.7 percent. If people cut down on consumption, it basically means they are spending less than before. This works in various ways. First, businesses on the whole see a fall in revenues and a fall in profits. This means that the employees are bound to be impacted.

Many businesses, in order to stay afloat, have fired employees. Some have cut salaries. Some others have rescinded on the job offers they made. Even businesses that are on a strong wicket have given only bare-minimum increments to their employees this year.

This can have a multiplier effect. Let’s say you run a kirana shop in an area where many people working in the BPO sector stay, and have lost their jobs. It is but natural that they will cut down on their spending and your earnings will fall as a result. It is worth repeating the cliché here that one man’s spending is another man’s income at the end of the day.

  1. Further, many big businesses have publicly announced that they are putting all their expansion plans on the backburner currently. If businesses don’t expand, then a fresh set of jobs don’t get created. This impacts those who are just about ready to enter the job market. Imagine the fate that awaits all the engineers and MBAs who will pass out in the summer of 2021. How many of them will actually find jobs? Other than impacting them, it will also impact their immediate families, perhaps financially but definitely emotionally. The dreams of a bright future for their progeny will be shattered, may be briefly, may be for a longer-term.
  2. Of course, the direct impact of the contraction is already being felt by people working in airline, hotel, tourism and cinema businesses. If they haven’t been fired yet, their jobs are definitely on the line. Banks and other corporates are cutting the rentals they pay for their branches and offices. This will impact the incomes of people who own such property. It will also impact the future prospects of those in the business of building such property.

To conclude, the impact of an economic contraction on an average individual isn’t always in a direct way, like job losses or salary cuts. There are indirect ways as well.

Dear reader, since no one knows you better than you yourself, you need to sit and figure these effects out. If you haven’t thought of any negative effects already, then clearly you haven’t heard the bad news yet.

Vivek Kaul is the author of Bad Money.