Article by Muntahar Ul Muzaffar from Economics Wing, GAEE JMI
With the National Statistical Office releasing provisional National Income estimates, shedding light upon the condition of the Indian economy, especially in terms of its GDP contraction, there has risen a need to understand and know the intricacies of the reasons behind this contraction. Speaking of the facts, India’s Gross Domestic Product (GDP) contracted 7.3% in 2020-21. Also, GDP growth in 2019-20, the time when dark clouds of the pandemic weren’t hovering above the country, was 4%.
Some reports clarify that in the January-March quarter, India’s economy was in a mode of acceleration, showing a growth of 1.6%. India seemingly had reported two consecutive quarters of GDP expansion after witnessing two successive quarters of contraction earlier in the financial year when India entered a technical recession. The growth represented India’s path of recovery until the second wave of Covid-19 hit the country, besides the expansion followed 0.5% year-on-year growth between October-December, when the restrictions were lightened a bit, owing to the traditional festive season.
Taking a bird’s eye view of the economic situation, it can be noticed that India’s GDP has narrowed pathetically by 7.3% ( It needs to be borne in mind that between the early 1990s until the pandemic hit the country, India grew at an average of around 7% every year). Tracking the reasons behind this decline, one comes across several things which account for the reasons behind this decline, primarily the explicit one being the pandemic itself. But stretching the line of reasons only over this pandemic would not be correct as there are others too (taking into account the fundamentals of the economy).
Regarding the fundamentals of the economy, GDP needs to be addressed before all the others and what meets the eyes in this sphere; contrary to the perception advanced by the Union Government, the GDP growth rate has been a growing weakness for the last five years. Furthermore, after the decline in the wake of the Global Financial Crisis, the Indian Economy started its recovery in 2013.
But more importantly, this recovery turned into a secular deceleration of growth since the third quarter (October to December) of 2016-17.
As the ripples of demonetisation and a poorly designed and hastily implemented Goods and Services Tax (GST) spread through an economy that was already struggling with massive bad loans in the banking system, the GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country. India’s GDP per capita presents no good a scene.
Another metric being Unemployment Rate, on which India has possibly performed the worst; first came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetisation and the one that saw the introduction of GST. Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of full employment declining in independent India’s history. As against the norm of an unemployment rate of 2%-3%, India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19. The pandemic, of course, made matters considerably worse.
What makes India’s unemployment even more worrisome is the fact that this is happening even when the labour force participation rate — which maps the proportion of people who even look for a job — has been falling. Seeing the inflation rate in the first three years, the economy greatly benefited from low crude oil prices.
On the one hand, the sudden and sharp fall in oil prices allowed us to completely tame the high retail inflation in the country, while on the other, it also allowed the government to collect additional taxes on fuel. But since the last quarter of 2019, India has been facing persistently high retail inflation.
On paper, India’s fiscal deficit levels were just a tad more than the norms set, but, in reality, even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated. In the Union Budget for the current financial year, the government conceded that it had been underreporting the fiscal deficit by almost 2% of India’s GDP. Also, the relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.
Thus, we can conclude that India’s economy is evidently not in good shape. If the government doesn’t show a substantial intervention, India’s GDP may not revert to the pre-Covid trajectory for several years to come.
(Muntahar Ul Muzaffar is a B.A. Programme student at Jamia Millia Islamia, Delhi, and a part GAEE JMI, an autonomous branch of Global Association of Economics Education in India. The views expressed are personal and they do not purport to reflect the opinions or views of GAEE or its members.)
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