Indian Economy: Rolling on a down track

Indian Government aims to become a USD 5 trillion economy by 2024 and subsequently USD 10 trillion economy by 2030. But the results of GDP which came out for the first quarter of FY21 does not support so. India’s GDP for the April- June 2020, pegged by 23.9%. This marked as the worst contraction since 1996 when India started to publish quarterly figures and also the worst among Asian economies. One of the biggest reasons for this figure is the complete lockdown in India (imposed on 25th March) which restricted several economic activities.

For the same quarter, last year the GDP was at a growth of 8.1%. This data has been released by NSO which comes under the Ministry of Statistics and Program Implementation (MoSPI). If the GDP falls in the next quarter too from July to September then technically India will be in recession. India will reel from the first recession period since liberalization. It was in 1979 when India had its last recession. 

Agriculture is the only sector which stood at a positive growth for this quarter but agriculture is only 14-15% of the total GDP, so only agriculture cannot help overall GDP to grow. 

But what is the reason behind this green shoot in agriculture? According to a Bloomberg Quint report, it is said that the growth of agriculture is based on price and not on the volume. The report further explained that as there was a price rise due to which there was inflation and hence the growth in this sector. 

All other sectors such as Financial services, real estate; Electricity; Public Admin, defence, other services; Mining; Manufacturing; Tarde, hotels, transport, communication; Construction have shown negative growth for this quarter. 

Let’s understand, What GDP means? And what contraction in GDP says? 

GDP stands for “Gross Domestic Product”. 

“Gross Domestic Product is the total value of goods and services produced within national boundaries during a specified period”

In India, for the first quarter FY21, a contraction of 23.9% GDP means, there is a 24-25% less value of goods and services produced in India when compared to the same quarter of last year. 

In simple terms, this contraction can be explained as if a person was earning Rs. 4000 per month previously so after this quarter when there is a decline of 25% or 24.9% in GDP, his earning is also been cut by such percentage and the final earning would now be reduced to Rs. 3000 per month. With this data the government income has also reduced and so the investments for defence, education or health will decrease. 

Before covid19 pandemic, the economy was already in a bad condition but due to this pandemic, the situation got worsen. Credit Rating Agency ICRA stated that the 23.9% contraction in the GDP may further go down when the data from small business and informal sectors will be included.

This contraction in GDP and the complete lockdown in India has badly hit job creation and has generated poverty. It was difficult to build jobs for more than 10 million people joining the workforce every year even when there was a growth of 5% GDP. But now as there is negative growth millions of people are thrown out from their jobs and are now facing poverty. According to a study by the Center for Monitoring Indian Economy (CMIE), there are 18.9 million people (21% of the overall workforce) who have lost their jobs between April and July. The World Bank estimates that almost 12 million Indians are pushed into abject poverty where over a fifth earns less than $2 per day. 

In 2019, Arvind Subramanian, Former Chief Economic Adviser to the Government of India stated that “The Indian Economy is in ICU” Below are some reasons before covid19 pandemic which were responsible for the slowdown of Indian Economy

1. Budget 2020 

• According to Bloomberg Quint, Budget 2020 was the biggest tax shortfall in a decade.
• According to a report by Business Standard on 1st Oct 2019, GST collect dips a 19- month low at Rs. 91,916 crores which for 2018, the revenue collection for the same month stood at Rs. 94,442 crores.

2. Unemployment

• According to Indian Today, unemployment was at 45 years high in 2019.

3. Consumer Confidence

• According to RBI Consumer Confidence Survey, the Consumer Confidence index drops to a six-year low in Oct 2019. 

4. Bank Credit 

• According to ICRA India Limited, during the fiscal ending March 2020 the bank credit is expected to grow at 6.5 to 7 % which would be the lowest growth in 58 years.

When the news of unlocking came, the Indian Economy showed some positive growth. In an Interview by NDTV with Chief Economic Advisor- Krishnamurthy Subramanian, it is said that economy recovery “is clearly on”. He stated that already for the month of August - Railway Freight, E-way Bills, Steel, Cement and Power Consumption has improved. 

Core sectors have shown initially a sharp fall and then a “V Shape” recovery for coal, oil, gas, fertilizers, refinery products, cement, steel and power. In April it was showing a 38.1% decline but gradually it got improved with the upcoming record as -23.4% in May, -15% in June and -12.9% in July.

A recent report by Morgan Stanley has shown that in the month of July/Aug the condition got improved. 

In recent Global Macro Outlook 20-21, Moody's said: "In our baseline projections, China, India & Indonesia will be the only G-20 emerging economies to post a strong enough pick up of real GDP in the 2nd half of 2020 and full-year 2021 to end next year above pre-covid19 levels,".

But, in a recent Bloomberg Quint article (based on the Linkedin post by Former RBI Governor, Raghuram Rajan), it was mentioned that India needs a bigger recovery and the recoveries are not an indication of V-shaped recovery but rather a result of pent- up demand which is likely to fade away if the economy stays battered.

He stated “The recent pick-up in sectors like the auto is not evidence of the much-awaited V-shaped recovery. It reflects pent-up demand and will fade as we go down to the true level of demand in the damaged, partially-functioning economy. No doubt, the government and its bureaucrats are working hard as always but they need to be frightened out of their complacency and into meaningful activity”.

He mentioned “The pandemic is still raging in India, so discretionary spending, especially on high contact services like restaurants and associated employment, will stay low until the virus is contained. The government provided relief becomes all the more important”.

“Without relief, households skip meals, pull their children out of school and send them to work or to beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Similarly, without relief, small and medium firms—think of a restaurant—stop paying workers, let debt pile up or close permanently. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself”

Mr. Rajan has also suggested some steps to the Indian government:

• Replenish Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA).
• Provide more direct cash transfers to the poorest households, particularly in urban areas, considering the duration of the pandemic. 
• Government and public sector companies need to clear their debts fast. Rebates on corporate income tax and GST charged by small businesses last year may be given. 
• Resources should be put aside for the recapitalisation of public sector banks.
• Cash-rich organisations such as Amazon, Reliance, Walmart should be allowed to minimize receivables and pay small vendors in a timely manner. 

With RBI’s loan moratorium now over, Rajan said the government should have a well-considered proposal to deal with the coming financial crisis. 

• A number of mechanisms can be in place to help debtors and borrowers entering into repayment commitment arrangements.
• A variety of arbitration forums can be set up to re-negotiate cases of varying proportions.
• Civil courts, debt recovery tribunals and NCLTs should be improved to include fast back-up decisions.   

This was the situation of the Indian Economy which really need to be taken care.

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