The Ministry of Statistics and Programme Implementation (MoSPI) released the data for the first quarter (April, May, June) of the financial year 2020, which shows the contraction of 23.9% in the Gross Domestic Product (GDP) of 2020 compared to the same period in 2019.
• In any economy, the GDP (total demand for goods and services) is generated from one of the four engines of growth.
• The biggest engine is consumption demand from private individuals, which account for 56.4% of all GDP before this quarter.
• The second biggest engine is the demand generated by private sector businesses which account for 32% of all GDP in India.
• The third engine is the demand for goods and services generated by the government, which account for 11% of India’s GDP.
• The last engine is the net demand on GDP after we subtract imports from India’s exports, since India typically imports more than it exports, its effect is negative on the GDP.
Almost all the major indicators of growth in the economy be it production of cement or consumption of steel shown a deep contraction. Even total telephone subscribers saw a contraction in this quarter.
With GDP contracting by more than what most observers expected, it is believed that the full-year GDP could also worsen.
Since economic liberalisation in the early 1990s, Indian economy has clocked an average of 7% GDP growth each year. This year, it is likely to turn turtle and contract by 7%.
Reason for GDP contraction
The Private consumption, w-hich is the biggest engine driving the Indian economy has fallen by 27%.
The second biggest engine, which is the investments by businesses has fallen even harder as it is half of what it was last year same quarter. So the two biggest engines, which accounted for over 88% of Indian total GDP, Q1 saw a massive contraction.
The net export demand (NX) has turned positive in Q1 because India’s imports have crashed more than its exports.
The government’s expenditure 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.
Also, the government’s spending increased but it could cover just 6% of the total fall in demand being experienced by people and businesses.
The net result is that while, on paper, government expenditure’s share in the GDP has gone up from 11% to 18% yet the reality is that the overall GDP has declined by 24%.
Implications of declining GDP
The construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%) were the worst affected sector. It is important to note that these are the sectors that create the maximum new jobs in the country.
In terms of the gross value added (a proxy for production and incomes) by different sectors of the economy, data-- show that barring agriculture, where GVA grew by 3.4%, and all other sectors of the economy saw their incomes fall.
Impact on Economy
In a scenario where sectors like construction, trade and other services is contracting so sharply i.e., their output and incomes are falling, it would lead to more and more people either losing jobs (decline in employment) or failing to get one (rise in unemployment).
With Covid-19, as people have stayed at home, the multiplier effect of spending has broken down to a large extent. This has, in turn, had a further negative impact on jobs and spending.
Private consumption during April to June contracted 26.7%. Also, with a physical lockdown in place and migrant labour moving away from the economically well-off parts of the country to their homes.
In fact, construction contracted by a little more than 50% during the period. Also,investment in the economy contracted by 47.1%.
As companies are encouraging their employees to work from home many peoples like drivers and cleaners where losing their jobs.
There is only one engine that can boost GDP and that is the government (G). Only when government spend more, either by building roads and bridges and paying salaries or by directly handing out money, then the economy can revive in the short to medium term. If the government does not spend adequately enough then the economy will take a long time to recover. Also, some suggested measures could be followed to revive the economy:
Banks should cut interest rates to ease the pressure on consumption.
Companies and brands should offer discounts and offers to get people to consume again.
Government can clearly do to get consumption going again is to reduce the GST on two-wheelers from 28% to 18%.
Government expenditure between April and June went up by 16.4% by putting in money into female Jan Dhan accounts. Now is the time to put money in male Jan
Dhan accounts as well.
The government also increased allocation and spending through the Mahatma Gandhi National Rural Employment Guarantee Scheme.
The Reserve Bank of India can also print money and fund government expenditure.