What's up with Economy

The FY20Q1 GDP results came in recently. It shrank by 23.9%. A quarter marred with the pandemic and its higher order effects including lock-down brought one of the most vibrant economies to a halt. Many people dwell on various aspects of this number. The critics of the government have admonished it for being the poorest performer among G20 nations. Others gaped in horror thinking about the actual impact as the informal sector's impact is not accounted in the GDP. There are others who see the silver lining. GDP denotes the sum total of goods and services produced in the country. It is a figure which tells us what has happened in the past. Present and future are altogether different aspects. The PMI figures for August were 52 indicating expansion in manufacturing output compared to previous month. This indicates we are returning from the downhill ride. As the government allows more relaxation under new phases of pandemic response termed 'Unlock', one would expect the economy to recover. However, can the economy fully recover with many sectors seeing no relief in immediate future - tourism, hospitality, recreation, travel, transport are all affected. An economy grows by creating multiple linkages among its many constituents. It is not just the number of constituents but also their size (economic value) and the density of linkages. These linkages result in what we call network effect. While the positives of it are experienced and well chronicled, the same could also affect negatively. Imagine a company asking people to work from home. This affects the many cab drivers, bus drivers and conductors, fuel station workers, operations at office - canteen, housekeeping, security, nearby shops and so on. These also have second order effects like less purchases of office clothing, footwear, consumables in office, stationery, water, electricity - affecting the industries. Less work related travel affects hotels, airlines, restaurants. Now, think of multiple such demand shocks. What do the industries do - cut down on expenses - workers lose jobs, goods and service providers also lose business. For how long - well as long as they could tide over the losses through liquidity and financial capital. Some may have to shut shop. As out of work folks lose income, they can in turn consume less. Difficult mess - isn't it. How do we get out of it? Consumers could look at a brighter future, better economic prospects and start buying more - that is INCREASE DEMAND. The suppliers/producers/service providers invest more to increase supply in expectation of increased demand. Not so easy. Both sides could wait for green shoots. The physical consequences of Corona - safe distances, less contact, hygiene requirements and fear of contracting the deadly virus is a disincentive big enough to hope profits from taking risk. Vaccine's availability and complete population inoculation seem still months away. Government could provide incentives and as a player in the market may lead the way. How much that would convince others is a big unknown. Government also has its own limitations owing to fiscal and current account situation. The worse thing for a recovering economy would be to get into economic peril through sovereign default and debt trap. We need innovative ideas on how we could overcome the challenges Corona presents and get back to economic growth prior to the pandemic. But be clear, the constitution of economy and hence GDP won't be the same. Some sectors like digital entertainment and media may benefit and grow more than usual to compensate for the lack of growth in travel and hospitality. Some businesses may go down under while others will take their place. This creative destruction will allow us to handle the new normal. A beacon of opportunity is to strive big in digital products and services where the market is not restricted to the country but the entire world. An expectation certainly not implausible from a country which has produced top notch tech talent.

Let's be empathetic to the economy and help it recover in our own way. Human imagination and grit has allowed us to survive. We need it to ensure we survive this pandemic too.