India’s Q1 Fiscal Year 2020-21 (the first quarter of the current fiscal) GDP contracted by 23.9 per cent GVA shrank by 22.8 per cent. This is not unexpected as the lockdown resorted to contain the spread of Covid-19 pandemic affected economic activities in almost all the sectors, and primarily the informal sector and the SMEs. This kind of pandemic was sure to negatively affect the GDP figures in almost all the parts of world including the US and Europe. But the extent of adverse effect of pandemic on the Indian economy was far deeper than it was expected. The forecasts and predictions of even the multilateral financial institutions and credit rating agencies were also far off in gauging the real extent of damage to the Indian economy.
The extent of impact of Covid pandemic in Q1
The GDP of India, a measure of gross total value of production in all the sectors in the economy, contracted by 23.9 per cent in the first quarter FY 2020-21. It is for the first time in 40 years when the GDP registered negative growth. Except agricultural production and government’s consumption, most of the vital parameters of the economy nosedived. The first quarter saw an unprecedented closure of shops, markets, and industries, which forced the wheels of the economy to a standstill. Except for agriculture, almost all the corners of the economy were severely hit. Both the supply side and demand side factors contributed in the dismal performance of the economy.
While the construction activity halved in first quarter, the manufacturing sector had a freefall. GVA of mining shrank 23.3 per cent; manufacturing 39.3 per cent; and construction fell 50.3 per cent. All sectors except agriculture shrank in the first quarter. Agricultural GVA rose 3.4 per cent. While private consumption expenditure fell on-year, the government expenditure rose significantly. PFCE stood at 54.3 per cent of GDP, compared to 56.4 per cent last year; and GFCE shot up from 11.8 per cent to 18.1 per cent in Q1.
The Q1 figures belied predictions
India’s economic growth stood at an estimated 4.2 per cent in 2019-20. The growth projections for current year by various global and domestic agencies indicate a sharp contraction of Indian economy ranging from (-)3.2 per cent to (-)9.5 per cent. While World Bank had projected Indian economy to contract 3.2 per cent, the International Monetary Fund (IMF) and Asian Development Bank (ADB) pegged it at 4.5 per cent and 4 per cent respectively. S&P and Fitch has projected a 5 per cent contraction, while Nomura said growth would be (-)5.2 per cent in 2020-21. More recently, domestic rating agency Icra has revised its forecast for contraction in the country’s GDP in the current fiscal to 9.5 per cent from 5 per cent earlier, saying continued lockdowns in some states have affected the recovery seen in May and June.
Will there be a recovery soon?
According to 15th Finance Commission Chairman N K Singh India will see a sharp V-shaped recovery in the third and fourth quarter of the current fiscal, but FY21 GDP growth would ultimately be in negative territory as the coronavirus lockdown led to serious demand and supply dislocations. He also said that global economic depression will continue to cast shadow on growth prospects next fiscal as well and added that the economic expansion in 2022-23 would determine whether or not the initiatives to revive growth are sustainable. The prediction of a V-shape revival of the Indian economy in the Q3 and Q4 of the current fiscal year may happen because of a lower base, rather than any great change in the fundamentals of the economy..Analysts feel that with availability of the latest data, there will be more clarity to assess the severity of the damage done to the economy by the coronavirus pandemic and build policy responses.
What needs to be done now?
The process of unlocking must continue to resume economic activities and movement, without jeopardizing the achievements of lockdown with regard to containment of Covid in a big country like India. The transport and logistics sectors should by and by come to normalcy so as to ensure supply of men and materials to the industrial units and finished products or agricultural products to market. The demand side factors, especially measures to increase disposable income in the hands of consumers will be very important for economic revival, especially in the rural areas. Monetary and fiscal policies need to be fine tuned for confronting the difficult situation. However, apart from monetary easing and fiscal incentives some of the problems with the fundamental drivers of the economy need to be addressed on priority. The GST hitches need to be resolved soon, especially plugging the loopholes and timely devolution of states’ share.
The Economic Survey 2019-20 estimated India’s GDP to be 5% in 2019-20 as compared to 6.8% in 2018-19. The GDP growth decelerated for the sixth consecutive quarter. It also predicted that in 2020-21, India’s GDP growth rate is expected to be in the range of 6.0%-6.5%. Now it is not possible in the immediate terms. The survey had rightly noted that the year 2019 was a difficult year for the global economy with world output growth growing at its slowest pace of 2.9% since the global financial crisis in 2009. A weak environment for global manufacturing, trade, and demand adversely impacted the Indian economy.
Nevertheless, the economic survey indicated some unwelcome trends in the economy, which need serious attention. For instance, Gross fixed capital formation in agriculture decreased from 17.7% of Gross Value Added (GVA) in 2013-14 to 15.2% of GVA in 2017-18. Secondly the contribution of the industrial and manufacturing sectors, the major employment generators were not up to the mark. The overall industrial sector growth is estimated to be 2.5% in 2019-20 as compared to 6.9% growth in 2018-19. Manufacturing sector is estimated to grow at 2.0% during 2019-20. In 2018-19, share of the Industry sector in GVA was 29.6%. The National Infrastructure Pipeline (NIP) has projected an investment of Rs 100 lakh crore over five years (2020-25) in various projects. The infrastructure deficit needs to be overcome for ensuring India’s attractiveness to investors and reducing the transaction cost, which would go a long way in improving competitiveness of the Indian economy. The Survey noted that financing of the NIP will be a challenge. Lastly, the bad loan problem in the banking sector also needs quick resolution without adversely affecting the investment climate and the risk taking ability of the entrepreneurs.