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What actually led India’s GDP to fall to -23.9%?

The greatest economic contraction that India has seen since its independence is on its way. A glimpse of it can be seen in the steep fall of the country’s GDP for the first quarter of Financial Year 2020-21.

The unprecedented pandemic is surely a big reason behind it, but can the pandemic be entirely blamed for -23.9% GDP? What are the other reasons behind this huge plunge of the world’s fifth-largest economy? And why are the experts saying that the real contraction is going to be much worse?

India’s falling GDP

India’s growth rate has collapsed by negative 23.9%. For the first time, such a collapse of GDP is seen since The National Statistical Organisation started releasing quarterly data in 1996. But the fall of economic growth for this quarter, when compared with the previous seven quarters; cannot be completely blamed on the coronavirus epidemic.

The GDP was falling, for the last eight quarters, it’s been consistently downhill. The last time India’s highest recorded economic growth after some dead-cat bounce was 8.3% in the financial year 2016-17. India broke its own economic momentum after 2016 with demonetization.

Politically people can have different opinions about it but economically it was like puncturing wheel of the country’s own vehicle. The economic growth of quarter 4, Financial Year 2019-20, just before the pandemic hit India, was already down to 3.1%.

What is the GDP of other countries of Q1 for FY 2020-21?

Except for the world’s second-largest economy China; every other large economy has incurred economic loss in the coronavirus epidemic and with the subsequent lockdowns.

After India, the UK’s GDP has seen the sharpest dip with contraction of -21.7% in April-June quarter; followed by France with the downfall of -18.9%. Italy’s GDP has fallen to -17.7%, this is the lowest GDP that Italy has seen since 1995. Canada’s economic growth declined to -13%, while it’s calculated annual fall of GDP is of -38.7%. Germany with -11.3% is witnessing such a sharp steep fall nearly after half a century.

Japan is also going through the worst economic contraction since 1980 with GDP contracting to -9.9%. The US’s GDP shrank to -9.1%, and the annualised calculated downfall of the economy of America is -31.7%.

Despite the fact that the economic growth of most of the countries has declined, India’s contraction is still at the peak of them all. India’s nominal economic growth rate is much higher, and it is a growing economy. When this is compared to the EU countries or with the USA, India’s plunge of -23.9% becomes much higher because it has fallen from a sizeable economic growth to a sizeable negative growth. India have a low economic growth compared to most of the western countries; it has a meagre per capita incomes which makes this downfall a big loss for the country.

Most affected sectors

If the GDP’s growth rate is broken and distributed amongst different economic sectors; the negative growth rate can be seen in almost every sector with an exception of the agricultural sector.

  • Manufacturing Sector contracted to -39.3%
  • Mining Sector contracted to -23.3%
  • The construction sector saw a contraction to -50.3%
  • Trade, hotels, transport, communication and service sector fell to -47%
  • Gross Value Added (GVA) witnessed a downfall of -22.8%
  • Real estate, financial and professional services shrank to -5.3%

The only sector that has flourished in this time of crisis is the agricultural sector which has seen a growth of +3.4%. The reason behind this could probably be because of the hike in the unemployment rate. People who lost their job have returned to their villages and in order to earn a livelihood have started working on the field; therefore profiting the agricultural sector.

What is the future of economic growth for India?

The new data expects that India’s economy will not recover in V or U shape but in K-shape. This means that people who are in profit will stay in profit while those incurring loss will be buried deeper in the picture. India’s growth potential can go back to 5%, and that would be like; taking the country’s GDP even before the pre-reform period of 1980-90s. And for a low-base economy like India, if this happens, it would be awful.

Average Indian’s real income adjusted with inflation in 2022-23 will be exactly the same as 2019-20. This would be like loosing three years from the country’s economy.

Huge damage to country’s economy is already done, to be able to revive from this India needs to introspect; on what exactly has it done wrong, and how it got itself in such a situation from 8.3% quarterly growth to -23.9%,