As the Indian government has released its citizens’ so-called results of April, June, and July. Everyone is stunned. A contraction of 23.9% in the Indian GDP in a quarter is hard to digest. Not to mention that it’s the worst hit ever recorded. You must be wondering Why did The Indian Economy fall so much?
So, let’s break it down.
Everyone’s talking about contraction in India’s GDP. Just to revise, GDP is basically the total value of goods and services produced during the period. For example- Our country produces goods and services worth $2.9 trillion. That’s our GDP. Of Course, there’s more to it. But this sums it handsomely.
GDP= Consumption + Investment +Government + Net Balance of Trade.
We’ll understand them one by one.
Not only India’s demand has taken a hit during this pandemic. There are others who lost their fair share of GDP. Some slipped into recession. And there’s one who is an exception here- China’s GDP grew at 3.2%.
Let’s see how India handled it.
How Indian economy fell?
Nearly every sector is affected during these unprecedented crisis. There are construction, manufacturing, services, mining, and hospitality among the worst hit.
Coming up to our first part- Consumption.
If we bring the actual figures, Indians spent Rs. 5,31,803 crores less than they did last year in the same quarter.
And note that figures should actually be increasing as population and income levels are increasing, mainly in India. But that’s rarely taken into account.
Demand by us- The citizens made around 57% of GDP last quarter.
Secondly, coming up to Investments by businesses.
India saw 5,33,003 crores of contraction here.
Also, note that our investments part accounts for nearly 32% of GDP.(As per last quarter)
Next comes the Government part.
This part is somewhat positive. The Indian government tried to revive the economy and save its citizens’ lives. As a result, it had to do expenses that weren’t planned and were admittedly hefty.
During this pandemic, govt. spent 68,387 crores more than it did in the same quarter of last year. But this isn’t enough to fill the gap of contraction of Consumption and Investments.
Lastly, coming to Net Balance of Trade.
It had a positive effect. As our demand fell, we bought less from abroad which resulted in a fall in imports, unlike previous quarters.
Admittedly, we exported more than expected.
It would not be wrong to say that it also acted as an enabler by which the Indian rupee value rose to its highest of 6 months.
Why did the Indian Economy fall?
As we all know, people spend according to their income. And during this period Income has fallen sharply. This forced households to cut back on expenditure. As a result, demand fell. Businesses stopped buying produce, their demand for labor plummeted, and demand for raw materials fell.
They stopped investing. And this again reduced Income levels.
This vicious cycle is called economy. Everything Is interconnected. That’s why the Indian Economy fell.
When it comes to the economy, Demand can lift it at a much considerable level.
As we see that demand is steeped. So is India’s GDP.
So, govt. has to work on enabling factors such as increasing income. This will help people to have money in their pockets. So, they can go and spend.
Govt. should focus on passing out funds to people by way of subsidies, incentives, and invite as much foreign capital as possible.
While we are saying all this, it should well be taken into account that govt. tax collection and other revenue are lower than estimated. It has stressed government finances.
Also, it would be the right step if the government starts its projects of building infrastructure, offices, roads which generates some employment in the economy. And keeps the flow flowing.
We are not joking, but when govt. Fails at doing so. It can also directly hand out money to citizens via air. It’s real and is called Helicopter Money
As the world is hit by Covid-19. Economic recovery may take some more time. India’s Chief Economic Advisor KV Subramanian pointed out, India is experiencing a V-shaped Economic recovery as lockdowns are relaxed. And Economic activities are starting out.
Also, if India’s economy records negative growth in the current quarter. It will enter into a recession.
Believe that’ll be worse.
As we see how sectors are recording negative growth.
It is often indigestible that how quickly India moved from the fastest-growing economy to the worst-performing economy. (in terms of percentage)
We are not yet sure of the V-shaped economic recovery curve. But one thing’s for sure. As soon as Coronavirus Vaccine is available. We will see something like this.
But as World holds a grip against Covid-19, with all new concepts like WFH and technological advances coming into the picture. We’ll find our way through this.
And as soon as Demand picks up, we’ll hopefully and gradually be back at our tracks.
Challenges are there.
Nonetheless, we are in this together 🙂
Till next Thursday….