The huge economic contraction suffered by the Indian economy in 4 decades. India’s GDP shrinks 23.9% in Q1, FY21. It's a worst-ever fall on record faced by the Indian economy in the April-June Quarter. The economy also suffering from the hardship of declining consumer demand and investment.
RBI Governor Shaktikanta Das said the global economy is heading into a recession. He also said inflation outlook is “highly uncertain”.
The GDP will expected to be remain in the contraction zone. For the year 2021, as whole real GDP growth is estimated to be negative.
The outbreak of COVID-19 has disrupted the economic activities all over the world, the industrialization has almost collapsed due to two months of severe lockdown in the country. The top-six industrialized states that account for 60% of India’s industrial output are highly affected by the pandemic situation.
As you all know, the whole economy is already suffering for a long time due to the COVID-19 lockdown, so the contraction in GDP was already predicted. Even the contraction in the rest of the world was also expected to be fall off weather its the US, Japan, or china.
Although China is back to positive. But its a shock for the whole country that almost a quarter of the GDP that would shave off almost the first quarter of the financial year 2021. The GDP will contract, it was expected by all, but it will move to negative, which is the highest contraction among all the countries almost i.e.25%.
Why There Is a Contraction in GDP?
- The main and foremost reason behind the contraction of GDP is the four engines of the growth in the economy i.e. Consumption, Investment, government consumption, and Import-export of the country. The biggest engine is private consumption, as much as it increases, it will constantly increase the GDP.
- In the Indian economy, this accounted for 56.4% of GDP before this quarter. Investment accounted for 32%, of all GDP, and services generated by the government were 11%. Net demand for GDP is the smallest engine in comparison to others. Since India typically imports more than it exports, its effect is negative on the GDP.
So total GDP = C + I + G + NX
Source: MoSPI and Express Research GrOup - When we compare the GDP quarterly, we compare the Q1 data of the current year with a Q1 of the previous year. That means that the Q1 of 2019 is being compared with Q1 of 2020.
- So the above chart shows that the goods and services we have produced in Q1 of 2020 are 24% less than the Q1 of 2019 because of the severe lockdown in the country due to pandemic lockdown. Demand from individual citizen and private businesses plummeted in Q1, increases in government demand made up for just 6% of this fall.
- Almost all the major indicators of the growth in the economy show the deep contraction be it production of cement or consumption of steel etc. Even the telephone subscribers saw a contraction in this quarter.
- The biggest blow is to private consumption that accounts for 27%, the governor said. The second-biggest engine — investments by businesses — has fallen even harder — it is half of what it was last year in the same quarter. So the two biggest engines, which covers for over 88% of Indian total GDP, Q1 saw a massive contraction.
- The other engine of growth — the government, which went up by 16% but this was nowhere near enough to compensate for the loss of demand (power) in other sectors (engines) of the economy. The last engine- NX or net export demand has turned positive in Q1, as the country’s import has been crashed more than its export.
It is a historical contraction for India’s GDP and if you look at the sectorial activity being agriculture, manufacturing, etc, it is being highly affected, but what is more crucial is the sectors which create new employability, new job in the economy. Like construction is almost 50% effected, manufacturing almost 40%, trade and hotels 47%, etc are worst affected.
Even the existing jobs are almost collapsed, the incomes of the individual fallen massively so forth are the reason that private individuals cut short the consumption, so the business also stops investing.
Under the circumstances, there is only one engine that can boost the GDP and that is the government expenditure (G). Only when the government spends more — either by building roads and bridges and paying salaries or by directly handing out the money.
- The second most important reason behind the contraction in GDP is the approach towards the GDP comparison. Different countries use a different approach to GDP comparison. Some countries do year-on-year (YoY), while several others do quarter-on-quarter (QoQ).
- Hence, while we compare Q1 FY20 with Q1 FY19, other countries may compare Q2 (i.e. April-June) with Q1 (Jan-March).
- That’s where the difference lies in how the countries report GDP growth. In India, GDP growth for a quarter is calculated by comparing to the same quarter the year before, which puts India’s GDP contraction at 23.9 percent for the June quarter.
- The other reason behind this is the severe two months lockdown in the whole country, which was not imposed by any other country around the world.
India is facing a much harder situation than most other economies because we had a more unnecessary lockdown without compensatory spending by the government. We also did not manage to control the spread of disease — so the decline is still there even with the unlocking of the economy.
The problem with the Indian economy is that it is already facing the contraction since a very long time. Government finances are being in constraints over the last few years, because of the economic slowdown. At that time, they did not have any money and as a result, we are now facing the money constraint. Economist says the government needs to step up with more fiscal measures due to the higher multiplier effect.
Impact of the Economic Crisis
Of course, this crisis is not unique to India. It is a global shock that is playing havoc across the world. Lets see how badly it impacted the country as compared to other countries.
India is cover with a large informal sector, that covers a maximum of GDP. One research says that there is a major impact on self- employed, casual, and regular wage workers across India reported a 64% drop in earnings, which is more than two and a half-times the reported decrease in quarterly GDP.
Another study by researchers surveyed urban workers found that earnings fell by 48 percent in April and May compared to January and February.
Another indicator noticed is unemployment. The unemployment rate peaked to 23% in April and May nearly three times what it was in January and February, and came down to 11% in June. Another indicator is the electricity consumption, which went 30% below than the normal level.
Weak investment, capital spending, and consumption demand hit badly on manufacturing, construction, tourism, and transport sectors even as agricultural growth is seen around 3-4 percent in the April-June quarter.
It will be a tough time for the country, for the next two quarters, and recovery will be too hard to manage. The RBI refrained from giving an estimate for the GDP but said that the assessment of aggregate demand during the year so far suggests that “the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum”.
Written by - Parul Verma
Edited by - Anusha Vajha
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