The Indian economy contracted by close to 24% in the April-June quarter, marking its worst performance in 24 years. This is the condition of the economy after the coronavirus pandemic ravaged what was once considered the world's fastest growing major economy. The investment collapsed by 47% compared to the previous year, while the household consumption shrunk by close to 27%. Although the government consumption increased by 16%, it wasn't enough to offset the sharp decline in activity in various sectors.
Many economists are of the belief that Narendra Modi’s demonetization of currency, a step taken in 2016 and a hasty and unplanned rollout of the goods and services tax (GST) inflicted blows to manufacturing and is responsible for the current slowdown in the sector. The distress caused by the contraction could be a lot worse within the informal sector which is said to be the backbone of the Indian economy. The informal sector was hit far harder than the organized sector during the nationwide lockdown during much of the April-June quarter.
Due to the coronavirus pandemic and by its extension, the lockdown, construction and trade and even transport and communication were hit the hardest in the last quarter with their production halved compared to that of a year ago. Manufacturing and mining too took heavy beatings with 39% and 23% plunges in output, respectively. These were followed by public administration and then utilities with -10% and -7% respectively. The only bright spot was agriculture with 3.4% growth. Despite various climatic conditions and floods in some parts of the country agriculture continued to move upwards.
Meanwhile, there seems to be no end to India’s Covid-19 problem. The daily rise in cases reached a new record of close to 80,000 taking the total number of infections so far to over 3.6 million. And hoping to turn the tables on the economy, the government is likely to ease movement restrictions. The policy stimulus has also hit a snag given stretched public finances and rising inflation. This means pretty much nothing can save the economy from continued deep GDP declines over the rest of the year. Recently the full-year FY2020-21 GDP growth forecast was cut from -5.2% to -8.6%. The below-expected 1Q FY2020-21 growth nudges it further down to -10.3%. We would imagine it being much worse than that without any more policy support.
Comments