What does the 24% shrink in India's GDP mean?

The year 2020 is turning out to be the worst year of the 21st century. The chaos and destruction can be seen everywhere. The whole world is combating an invisible enemy and it has put knives on the throats of people. It feels like a war situation when stepping out of homes is prohibited. You go out and boom the Corona explosion will occur. The number of infections is climbing up and is nearing the 30 million mark globally and the fatalities are inching towards the one million mark.

 

Talking about India in particular, the daily number of infections is around one lakh. Coronavirus has claimed more than 70 thousand lives in India. It has affected almost every sector and the economies are severely affected. The latest revelation about the GDP has left people in worries. 

 

India has recorded the lowest ever growth of -24% in its GDP in the past four decades. The growth in different sectors that contribute to the GDP is even more pathetic. The predictions about the negative growth have come out to be true and the situation has worsened. Read the article to know the reasons and what does this 24% shrink or contraction in the economy to do with the lives of normal people? What is with the other big economies of the world? How is India going to get back on its feet and how long will that take? What economists have to say about the contraction and their suggestions on the recovery? To start finding answers to these questions, let's begin with explaining about GDP and some economic terms. 

 

 

What is GDP and how is it calculated?

 

Gross Domestic Product abbreviated as GDP is the total value of goods and services produced by a country in a particular period. The time frame over which GDP is measured can be a year or a quarter. GDP is an indicator that is used to determine the economic health of a country. The growth and decline or shrink in GDP would tell about the development in a country. The other major use of GDP numbers is that it helps the statesmen and investors to understand the market and hence act accordingly. The governments frame policies based on the GDP growth rate and it also facilitates the investors with marketing numbers to decide on better areas of investment.

 

When looking at the calculation of GDP numbers, different economies have different ways.

 

For India, it is calculated every quarter of a fiscal year and then annual numbers are released at the end of that fiscal year. The Central Statistical Office (CSO) is responsible for accumulating numbers for the calculation. There are two methods of coming up with GDP numbers- GDP at factor cost and expenditures-based method. Further, the nominal GDP is calculated using the current market price and the real GDP is arrived after adjusting for inflation. While the GDP at factor cost reveals the performance of different industry sectors, expenditure-based GDP indicates the different areas of the economy. 

 

There are different sectors that yield in the production of goods and services. The GDP numbers are calculated after tracking the production in all such sectors. Eight sectors which are taken into consideration while calculating the GDP at factor cost are agriculture, mining, manufacturing, financing, hospitality, and transportation, construction, business services and community, social and public services. For the calculation of expenditure-based GDP, all the spending incurred on final goods and services are added that includes consumer spending, government spending, business investment spending, and net exports.

 

 

What do the numbers say?

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Some points that need emphasis

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The National Statistical Office on 31 August 2020 released the data for the Estimates of Gross Domestic Product for the First Quarter of the Fiscal Year 2020-21. 
 

“GDP at Constant (2011-12) Prices in Q1 of 2020-21 is estimated at  26.90 lakh crore, as against 35.35 lakh crore in Q1 of 2019-20, showing a contraction of 23.9 percent as compared to 5.2 percent growth in Q1 2019-20..”.

-National Statistical Office (NSO), India

 

This statement caught the attention of people and made headlines as it should do. It is being recalled as the lowest ever growth in the past four decades. All sectors except the agriculture sector have shown negative growth in this period.

 

 The most affected of these are construction which saw a growth of -50%, trade hotels and other services (-47%), manufacturing (-39%), and mining(-23%) and it must be noted that these sectors are the ones that create most new jobs in the country. However, the agriculture sector saw an increase of 0.4% in this quarter as compared to the previous year. 

 

In any economy, the four contributors to the growth are demands from private individuals, demand generated by private sector businesses, third is the demand from the government, and the last is the net demand on GDP after subtracting imports from the exports. The final GDP is calculated after adding these all numbers. For the first quarter, the demand from private individuals, the biggest contributor, has fallen by 27%. The second in the list, demand from private businesses saw a decline of 50%. The third important in the list, demand from the government, however, saw an increase of 16% but it was insufficient to compensate for the contraction caused by the fall in the two major contributors, which account for more than 88% of the GDP. 

 

 

The scenario at the global level

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The scenario at the global level

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The whole world is facing a crisis and hence no economy has shown a positive growth except for China. Business today released an infographic that showed the contraction in economies of G-7 members along with India and China. The infographic shows the contraction in the UK's economy of 21.7% while the USA, the most affected country by the coronavirus crisis, saw a contraction of 9.1%. France's economy contracted by 18.9%. China, on the other hand, saw a growth of 3.2%. 

 

“The recently released quarterly GDP growth numbers for the first quarter of FY2020-21 should alarm us all.”

- Raghuram Rajan, Ex-RBI governor

 

The reason behind and the way out

 

There is a reason for every happening and so does this. It's not a mystery at all. The spread of Coronavirus has halted normal lives. The numbers are for the first quarter i.e. for the first three months of the fiscal year. The government had enforced a nationwide lockdown in the first two months, April and June, of this quarter. This means that no economic activities were being operated. Industries were shut, people were not allowed to move. Services of the Indian railways were completely closed, which never happened in India's history, even in the time of wars. However, in the third month i.e. June, Unlock 1.0 was brought in practice. Economic activities were being opened up but not completely. 

 

One more thing that must not go unnoticed is that it has not happened suddenly. India's GDP was already seeing a decline in the past four years. The GDP for the fiscal year 2019-2020 was 4.2% and for the fourth quarter of this year was 3.1%. Sales of commercial vehicles were at -9.5% for the Q1 of 2019-20. 

 

Economists had predicted a contraction of a maximum of 20%, but it came out to be even worse. 

 

Looking at all the stats and the reason behind the contraction, the way out seems like a steep hill to climb. The vaccine for coronavirus is not yet available and this means that the second wave of infections can hit us anytime. Private companies will show no or little interest in investment. Private individuals don't have funds to purchase and hence demand from this engine is going to be acute. All eyes are on the government to create demands, provide funds or create job opportunities. 

 

 

Conclusion

India's economy is witnessing a steep decline and it may take years to recover. The unemployment rate has increased and that too is a major challenge for the government. It will be interesting to see the recovery in the second quarter. If it contracts for two consecutive quarters, India will officially be in the list of nations in recession and it doesn't seem unrealistic as Fitch has projected India's economy to contract by 10.5% this fiscal.