Why in news?
The Ministry of Statistics and Programme Implementation (MoSPI) released the data for the first quarter (Q1) of the current financial year.
What does the data reveal?
- Most observers expected that India’s GDP contraction would not exceed 20% in the first quarter (April, May, June).
- [GDP - Final value of the goods and services produced within the geographic boundaries of a country during a specified period of time.]
- As it turns out, the GDP contracted by 24% in Q1.
- Almost all the major indicators of growth in the economy - production of cement or consumption of steel - show deep contraction.
- The data quality is sub-optimal because of the widespread lockdowns.
- Most observers expect this number to worsen when it is revised in due course.
What is the biggest implication?
- With GDP contracting by more than what most observers expected, it is now 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% for the full financial year.
- Data show that barring agriculture, where the gross value added (GVA) grew by 3.4%, all other sectors of the economy saw their incomes fall.
- [GVA - A proxy for production and incomes]
- The worst affected were construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%).
- It is important to note that these are the sectors that create the maximum new jobs in the country.
- In a scenario where each of these sectors is contracting so sharply, it would lead to a decline in employment or rise in unemployment.
What causes GDP contraction?
- In any economy, the total demand for goods and services i.e., the GDP is generated from one of the four engines of growth.
- The biggest engine is consumption demand from private individuals (C).
- In India, this accounted for 56.4% of all GDP before this quarter.
- The second biggest engine is the demand generated by private sector businesses (I) and this accounted for 32% of all GDP in India.
- The third engine is the demand for goods and services generated by the government (G), and it accounted for 11% of India’s GDP.
- The last engine is the net demand on GDP after we subtract imports from India’s exports (NX).
- In India’s case, it is the smallest engine and, since India typically imports more than it exports, its effect is negative on the GDP.
- So total GDP = C + I + G + NX
How did these engines perform?
- Private consumption has fallen by 27%.
- The demand generated by private sector businesses has fallen even harder - 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, saw a massive contraction in the Q1.
- The NX has turned positive in this Q1 because India’s imports have crashed more than its exports.
- The last engine of growth, 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.
- The government spending increased meagrely that it could cover just 6% of the total fall in demand being experienced by people and businesses.
- It is the lower level of absolute GDP that is making the government look like a bigger engine of growth than what it is.
What is the way out?
- When incomes fall sharply, private individuals cut back consumption.
- When private consumption falls sharply, businesses stop investing.
- Since both are voluntary decisions, there is no way to force people to spend more and/or coerce businesses to invest more in the current scenario.
- The same logic holds for exports and imports as well.
- Under the circumstances, there is only one engine that can boost GDP and that is the government (G).
- Only when government spend more, can the economy revive in the short to medium term.
What is holding back the government from spending more?
- Even before the Covid crisis, government finances were overextended.
- It was not only borrowing but borrowing more than what it should have.
- As a result, today it doesn’t have as much money.
- It will have to think of some innovative solutions to generate resources.
Source: The Indian Express