What really is the state of the Indian economy?

An analysis of GDP Contraction and what does it mean for India

Today’s Brew 

India reported its first-quarter (April-June 2020) GDP growth numbers for the financial year (FY) 2020-21 on Monday, 31 August. As was expected by many analysts, the Indian economy contracted by 23.9% YoY (year-on-year).

This is the steepest decline in GDP numbers in recent memory and the numbers are sobering when compared to other countries as well. So, is it all doom and gloom on the economic front? Or do these numbers tell only a partial story and the complete picture is markedly different?

India enforced one of the earliest stringent COVID-19 induced lockdowns. Q1 of FY 2020-21 coincided with the most stringent phase of this lockdown.

Here is a small primer about GDP

If a country were a household, GDP is like its income. Banks will give you a bigger loan if you earn more income and more money. In the same way, investors will be happy if the country produces more goods which will lead to more GDP. So basically everyone will be happy if GDP is growing and Q1 if 20-21 is not going to make us happy.

However, the numbers for Q1, reported with a two-month lag, tell only one part of the story. First, high-value indicators available for the month of July and the first half of August, not accounted for in the numbers reported yesterday, clearly indicate that the virtual shut down of the economy is over and different sectors are picking up at varying levels. 

Transport, manufacturing, mining, construction, tourism, hospitality, transport for approximately 65% of the economy, were totally closed down during this period and hence the sharp decline was only natural and to be expected.

Even then, some sectors still witnessed growth, such as the agriculture sector, which grew at 3.4% YoY. Other sectors showing positive growth were communication & broadcasting (7.1%), public administration (3.8%), storage (3.5%) and banking (1.2%).

Foreign Direct Investment (FDI) has been stellar, even in these times of economic stress. Between April to July India attracted almost $22 billion. This is coming on the base of an already very good previous year when India attracted close to $74 billion, its highest ever.

The most important part is the game-changing reforms undertaken in the last few months which will start showing results as the country resumes full economic activity. Consider some of the reforms announced in the last few months.

Fully commercial, private coal mining is now allowed in India, reversing an almost 50-year-old ban. The agriculture sector has been freed from the clutches of over regulation. Private, contractual farming is now allowed reversing an almost seven-decade old policy.

Senior functionaries of the government have indicated that these are not the only weapons in the economic arsenal and some further action can be expected in the next few weeks and months.

Overall, the economic outlook for the complete fiscal year, 2020-21, therefore certainly looks much brighter when seen holistically. The Economist Intelligence Unit (EIU) forecasts that India will be one of few countries to recover the fastest from the COVID-19 induced distress.

According to the EIU, in Q3, India’s output will be similar to that registered one year ago and that the country will recover to 2019 GDP levels in 2021

See you tomorrow with another insight