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India’s GDP is at Historic Low: Looking Beyond the Impact of COVID-19 Pandemic!

India’s historic GDP contraction in the first quarter of 2020-21 is mainly due to the damage caused by the COVID-19 pandemic. However, other economic factors have also contributed to poor growth performance.

On Monday, the official data released by the National Bureau of Statistics revealed how the period from April to June (months under strict lockdown in India) proved to be a curse for the country’s already slackening economy.

Although the sudden Covid-19 shock since April has played an important role in hindering growth, weak the financial and economical fundamentals have dismantled the country’s financial stability even before the pandemic broke out. 

DECLINING SINCE 2019

Due to the plethora of economic issues, including the liquidity crisis, weak banking sector, declining investment, and high NPAs, economic growth has declined rapidly since the beginning of 2019. Before the pandemic completely brought the economy to a standstill, industries such as manufacturing, construction, and real estate fell rapidly.

 As the economy faces its worst recession in history, the devastation caused by the pandemic will worsen the situation in these sectors. The depth of India’s commercial contraction in the first quarter can be determined by facts that only two growth indicators managed to maintain positive growth: agriculture and government consumption spending. 

POSITIVES

The contribution of agriculture to GDP in the April-June quarter increased by 3.4%, which was higher than the 3% in the same period in 2019-20. Another positive indicator is the drastic change in the government’s final consumption expenditure,( from 12.3% in 2019-20 to 11.8% in 2020-21). Without these, the economy will fall into a deeper level and the mission of recovery will become more difficult.

As the government formulates the next steps to get the economy back on the track, it demands to focus on core fundamentals, which were weakened before the pandemic and lost immunity after the lockdown caused by the virus that paralyzed the country. 

LOOKING BACK AND MOVING FORWARD

It is expected that the financial impact of the pandemic will be reduced as the government gradually implements plans to further unlock the economy. Most companies got a green signal to reopen, and in August, factory activity data increased for the first time in five months. However, this does not mean that the economy will experience a V-shaped recovery, as Chief Economic Advisor KV Subramanian claimed.

Several economists believe that the contraction of gross domestic product (GDP) was severely underestimated by -23.9% as data collection efforts were hit hard during the lockdown and pandemic. The revised growth estimate may provide more accurate information in the future. It should be noted that India has become the second-worst country after the United States in terms of GDP contraction among major economies.

The UK is the only other country with a GDP contraction rate of more than 20%. After the Covid-19 pandemic struck, both the United Kingdom and the United States are likely to see advancements in basic indicators going forward as both adopted stimulus measures.

For example, the job security programs were introduced by the government, and people who were furloughed or unemployed during the coronavirus pandemic, are eligible for partial compensation.

INDIAN PACKAGE

On the contrary, India’s package of almost 21 billion rupees mainly supports the poor and small businesses but fell short of protecting the several numbers of salaried people who have lost their jobs.

During the ongoing pandemic, nearly 1.8 million salaried people have lost their jobs, but the only help they received was a moratorium on and EMI payments. It is worth mentioning that the salaried class in India accounted for a large proportion of non-government spending growth-which has been severely hit during the lockdown and pandemic.

India’s stimulus package has also put more pressure on the banking sector that is already in trouble. For example, most of the help provided as part of the inducement package was in the form of government-guaranteed loans that companies can obtain from banks.

Indian banks are already under pressure due to their large stake of non-performing assets. The loan moratorium announced for six months has hit the bank again.

Now, many bankers and economists are worried about the decline of India’s banking and financial industries, which were expected to play a pivotal role in the country’s recovery, after the economy comes out of a coma.

DEMAND, DIRECT MEASURES, JOB CREATION

The severity of the Gross Domestic Product contraction may be reduced in the next quarter, but without direct measures aimed at creating jobs, it will be difficult for India to drive itself out of the contraction area.

Improving consumer confidence is a fundamental aspect of non-government expenditure growth, which can only be achieved by creating more jobs. At present, India seems to have formed a demand vacuum, where middle-income groups have greatly reduced their spending on things other than basic commodities.

As expected, the June quarter contracted sharply. Investment demand fell by 47.5%, while private consumption fell by nearly 21%. The service industry fell by 20.7% year-on-year, which was the main drag on the service industry growth, an economist at IBM, Shashank Mendiratta told Reuters.

The government also needs to re-examine the revival plan for MSMEs and other small businesses-due to the impact of the pandemic, most MSMEs have closed their doors. Many people are reluctant to choose loans because their business is already in trouble.

ICRA chief economist Aditi Nayar stated that when revised growth data is released, incoming data on MSME and the informal sector may cause a deeper contraction. However, according to Suvodeep Rakshit, senior economist at Kotak Institutional Equities, stated that several economists also agree that the government does not have enough leeway for maneuver and therefore must proceed with caution.

The government’s choice will depend on whether it needs to push consumption or investment. Given the insufficient financial space and the need to stimulate more sustainable growth, the recovery of growth will be gradual and likely continue until 1HFY22, he told Reuters.

Economists have collectively questioned the government’s model of stimulus measures against the pandemic. Many people consider this to be a suboptimal response and worry that it may cause a period of stagnation after the initial recovery due to the easing of the lockdowns.

Although the increase in rural activity bodes well for the economy, the government needs to encourage more investments in the core employment sectors or concentrate on direct policy measures to arouse the demand. Besides other stimulus measures, India may experience years of slow growth.

 

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