Finance The Ledger

The Indian Economy and GDP contraction in Q1.

The Indian Economy and GDP contraction in Q1

The spending split showed growth in public spending, private consumption fell by a quarter, and investments almost fell by half.

The amount of decline seems to have surprised many, but it shouldn’t have.

The first blockade reduced almost two-thirds of GDP, and although this proportion was reduced in later stages, until the end of May the activities that accounted for almost a fifth of GDP remained restricted. Even in August, we estimate, as much as 9 percent of GDP was constrained by regulation or fear.

The Indian economy contracted 23.9% in the first quarter of the current fiscal year. It is for the first time in 40 years when GDP registers negative growth. While construction activity was cut in half in the first quarter, the manufacturing sector had a free fall. The GVA of mining contracted 23.3 percent; manufacturing 39.3 percent; and construction fell 50.3 percent. All sectors, except agriculture, contracted in the first quarter. Agri GVA increased 3.4 percent. While spending on private consumption fell year after year, public spending increased significantly. The PFCE stood at 54.3 percent of GDP, compared with 56.4 percent last year; and the GFCE soared from 11.8% to 18.1% in the first quarter. With the latest data, there will be more clarity to assess the severity of the damage that the coronavirus pandemic has caused to the economy and how to take care of the economic reactivation in the coming quarters. The first quarter saw an unprecedented closure of stores, markets and industries, forcing the wheels of the economy to paralyze. Except for agriculture, almost every corner of the economy was severely affected.

The economy sank seriously in April when there was a total lockdown. Even the agricultural sector, which operates outdoors and could have continued normally, was negatively affected by the collapse in demand and the freeze in trade and transportation. Arrivals to mandi from northern India had dropped to half what they were in April 2019. Floriculture, horticulture, vegetables, poultry and milk are some of the staples that suffered.

Production of raw materials was allowed during the shutdown, but fast-moving consumer goods (FMCG) companies faced a drop. Most people were unable to go to work, so the roads were empty and offices and factories closed. Government offices were also closed and only essential administration and police were operating.

As the lockdown eased in stages starting in May, activity began to pick up. The reason is, as this author has pointed out since the time of demonetization, that the decline in the disorganized sector is not reflected in the GDP data. It is not collected in the annual GDP data and even less so in the quarterly data that have been published since 1996. In fact, the quarterly data does not even fully capture the organized sector. It is based on very limited data such as the Industrial Production Index, a few hundred companies in the business sector whose reports are published, rail traffic and bank data. All of these represent just the organized sector. Agriculture is the only unorganized sector component whose data is used. Therefore, the -23.9% growth rate announced now is largely the rate of decline of the organized sector.

The unorganized sector represents 94% of employment and 45% of production in the economy. Agriculture is its most important component and its data are available, but for the rest, the data is not available. It is collected once every five years and in the middle it is assumed that the organized sector can also be used to represent the unorganized sector. This is not true after an impact such as demonetization or closure.

India is becoming the worst performing economy and Britain is the next worst country at -20.4% and China is the best performer with a positive growth rate of 3.2%. In one quarter, China went from a decline of -6.8% to a positive growth rate. Why is India so much more affected than other G20 countries?

First, the lock was not implemented correctly, so the benefit of the lock could not be obtained. The blockage is decreasing as the number of cases increases rapidly. The first round of attacks is proliferating and the number of infections is increasing creating great uncertainty. Repeated local closures had to be ordered, disrupting production. Second, as mentioned above, there is a very large unorganized sector unlike other large economies.

Third, large numbers of people are alienated from the system and lack faith in the authorities. Then they mock the official pronouncements. Some people believe this is a manufactured crisis and the authorities are misleading them. Often, you see people who go without masks and do not maintain physical distance. This allows the virus to proliferate. This is also the lesson of countries that have managed to control the spread of the disease: the moment there is laxity, the disease begins to proliferate again.

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