The Indian economy, in three time horizons
India’s GDP contracted by 23.9% in the April-June quarter this year compared to the same period last year, suggesting that the lockdown hit the economy hard. To be sure, the GDP numbers released on Monday are only the first estimates and they could be revised further downwards. This is because the informal sector numbers will only become available at a later stage, Pranab Sen, India’s former chief statistician, said. CEA Krishnamurthy Subramanian, ministry of finance, attributed the performance to an exogenous shock (the pandemic) that has been felt globally, and said India has already started a V-shaped recovery after the lockdown was eased.
The slowdown before the pandemic
The Indian economy was in one of its worst ever deceleration phases even before the pandemic. GDP growth declined continuously for eight quarters except an 8 basis point blip between December 2018 and March 2019. It was 8.2% in March 2018 and fell to 3.1% in March 2020.
Consumption demand is the biggest driver of economic growth. 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 headwinds to consumption demand, firms shelved investment plans. And Gross Fixed Capital Formation (GFCF) contracted at an increasing rate for three consecutive quarters ending March 2020.
Nominal GDP growth in 2019-20 fell to just 7.2%, the lowest since 1975-76. The 2019-20 Union Budget assumed 12% nominal growth. Nominal GDP is crucial for revenue collections.
How the lockdown hurt
India’s GDP contracted by 23.9% in the April-June quarter this year compared to the same period last year. This suggests that the lockdown’s toll on economic activity has been more severe than expected. A Bloomberg poll of 15 economists had expected the contraction to be 19.2%. India was under an almost complete lockdown for the months of April and May.
The contraction has affected the entire non-farm economy including the government sector. Agriculture was the only silver lining with a growth of 3.4%. Gross Value Added (GVA) which measures the value of production minus taxes contracted by 22.8%.
The expenditure side numbers suggest that both consumption and investment demand collapsed during the lockdown. Private Final Consumption Expenditure contracted by 26.7%. Gross fixed capital formation, which measures investment, suffered a contraction of 47.1%. Government Consumption Expenditure grew by 16.4%. Even nominal GDP declined 22.6%, which means that the base of tax collection will also shrink.
These numbers could see further downward revisions, as the first estimates use formal sector performance to project informal sector numbers.
How can the government fix the economy
While lockdown restrictions have been eased, the continuous rise in infections means that consumer sentiment continues to deteriorate further. This was clearly seen in RBI’s latest consumer confidence survey conducted in the month of July. Given anecdotal accounts of income and job losses, this is not very surprising.
Some of the recovery seen in June might have been the result of pent-up demand due to the lockdown in April and May. Purchasing Managers Indices (PMI) suggest that the recovery seen in June started reversing or flattening in July. To be sure, the index of eight core sector industries contracted at a slower pace in July (9.6%) than in June (13%).
This makes it all the more necessary that the government announces a big fiscal stimulus. State governments will be unable to deliver on this challenge, as they have to bear a disproportionate burden of the pandemic’s impact on revenue.