Understanding the GDP contraction: what does it mean for the future of India?

The contraction in the QFY21 GDP as per the National Statistical Office (NSO) is -23.9%, which is severe, but not unpredictable. Now that the economy is on a slope, going down, what can be done to bring it back to the stable ground?

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The GDP has shown growth in the income split of agriculture with miner declines in financial services, public administration, and daily utilities and a significant reduction in construction, manufacturing, retail, hotels and, transportation. Government spending has increased on the expenditure split front, and both investments and public consumptions have decreased. All the data is in accordance with the predictions of many economists who assessed the impact of COVID-19, lockdowns, and activity restrictions on the Indian economy.

The continued fear of COVID-19

While the Central government has started the process of unlocking, state and local governments are still practicing lockdowns on weekends and random weekdays. This has brought a further halt to the economic processes even though the fatality rate is one or less per thousand cases in the country. The need for the hour is to conduct more studies that lessen coronavirus’s fear in public and allow the government to stabilize its fiscal response.

Can the scale of contraction be incorrect as the damage to the informal economy is not included here?

More than 40% of Indian GDP is informal, i.e., there is no data available on them, even on an annual scale. Quarterly GDP data is less hard than the annual data, and so, this is not the absolute quantification of our economic situation. The GDP in the last few quarters have also been shallower, but does that mean that the GDP growth has decreased? If the year-on-year momentum is increasing, the GDP is stable. So we should wait for the FY21 data to come. However, the pace of rebound has definitely decreased because of two major reasons:

  • Restriction of economic activities and socialization
  • Impact of a weak economy in the last five months of 2020

Is the country headed to a stage of recession post corona?

Experts believe that there are three main reasons why one should not read much into the inflation data as of now. Firstly, the consumption rate and figures are highly different than what the CPI is based on. For example, the weight of market-priced grain is ten times the subsidized grain in CPI. As many people are getting free grain now, the inflation will be 200 basis points lower when this data is shown up. Secondly, the lockdown has created a shortage and irregularity in supply chains and markets. Thus, the economy is currently supply-driven rather than demand-driven. Thirdly, there is an uncertainty in supply resumption even in categories like agriculture. To reduce the economic uncertainty, reviving supply is more difficult than reviving the demand. Still, reading these data trends leading to inflation is an extension of the severity of current situations.



The Policy Times Recommendations

  • State investment and decreasing the load from RBI by the central government is required to balance out the fiscal impact.
  • The state government also needs to be actively involved and start permitting activities as much as it is safe to do so.
  • New government constructions and development schemes must be introduced to generate revenue.
  • The current depreciation in the economy is here to stay, but as citizens, we also need to get more financial concerned and support our government with fewer tax lapses and help balance the economy.
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Understanding the GDP contraction: what does it mean for the future of India?
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The contraction in the QFY21 GDP as per the National Statistical Office (NSO) is -23.9%, which is severe, but not unpredictable. Now that the economy is on a slope, going down, what can be done to bring it back to the stable ground?
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THE POLICY TIMES
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