The Indian economy was in one of its worst ever deceleration phases even before the Covid-19 pandemic. GDP growth fell continuously for eight quarters (except for a .08 percentage point blip between December 2018 and March 2019. It was 8.2% in March 2018 and had fallen to just 3.1% in March 2020. March saw just a week of the lockdown (which would eventually last 68 days, albeit with some relaxations).
Even before the full force of the pandemic hit India (which was really in April-June quarter in terms of livelihoods; and July onwards in terms of lives with both cases and deaths rising), the slowdown was already worse than the one the Indian economy went through in 2011-12.
Back then, quarterly GDP growth fell from 10.3% in March 2011 to 4.9% in June 2012. However, the economy started recovering after 2011-12. Annual GDP growth fell from 8.5% in 2010-11 to 5.2% in 2011-12. This contraction was followed by a sharp recovery until 2016-17. This has not been the case this time and GDP growth has been falling continuously since 2017-18.
Consumption demand is the biggest driver of economic growth in India. In 2019-20, Private Final Consumption Expenditure (PFCE) had a share of 57% in India’s GDP. PFCE growth collapsed to 2.7% in the March 2020 quarter, the lowest since June 2012. Given the strengthening headwinds to consumption demand, firms started shelving investment plans. This can be seen in Gross Fixed Capital Formation (GFCF) contracting at an increasing rate for three consecutive quarters ending March 2020. A collapse in investment demand has adverse implications for future growth potential of the economy. It was only government expenditure which was acting as a counter-cyclical force to some extent.
Nominal GDP growth in 2019-20 fell to just 7.2%, the lowest since 1975-76. The 2019-20 Union Budget assumed a 12% nominal growth. Nominal GDP is crucial for revenue collections, as taxes are a fraction of nominal incomes. The sharp fall in nominal growth was a big reason for a huge shortfall in tax collections in 2019-20. According to data from the Controller General of Accounts, which works under the ministry of finance, gross tax revenue collections were just 81.6% of the budget estimates in 2019-20, the lowest since 2000-01.
To be sure, the Corporate tax cut announced in September 2019 and the overall slowdown in the economy exacerbated matters on the revenue collection front.