Understanding India’s GDP Fall

What is the issue?

In the latest estimates of economic growth (for the financial year that ended in March 2021), India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21.
It is imperative, in this context, to understand the reasons for this contraction in GDP.

How could this be approached?

To look at this as an outlier - India, like most other countries, is facing a once-in-a-century pandemic
To look at what has been happening to the Indian economy over the last decade, and more precisely over the last 7 years

Notably, between the early 1990s until the pandemic hit the country, India grew at an average of around 7% every year.
So, the latest GDP data suggests that India’s economy had been steadily worsening during the current regime even before the Covid-19 pandemic.
The “fundamentals of the economy” (a bunch of economy-wide variables showing an economy’s health) suggest this, as discussed below.

How has the GDP been?

The GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.
After the decline in the wake of the Global Financial Crisis, the Indian economy started its recovery in March 2013.
This recovery turned into a deceleration of growth since the third quarter (October to December) of 2016-17.
While RBI does not state it, the demonetisation move and the hastily implemented GST impacted the economy (already struggling with bad loans in the banking system).
Consequently, the GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.
In January 2020, the GDP growth fell to a 42-year low (in terms of nominal GDP).

What is the GDP per capita level?

GDP per capita is the total GDP divided by the total population.
It is used to better understand how well-placed an average person is in an economy.
From 2016-17, India’s GDP per capita started decreasing.
As a result, India has been losing out to other countries.
Even Bangladesh has overtaken India in per-capita-GDP terms.

How has unemployment rate traversed?

Between 2012 and 2018, the total number of employed people fell by 9 million.
This is the first such instance of total employment declining in independent India’s history.
India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19.
This is against the norm of an unemployment rate of 2%-3%.
More worrying is the fact that unemployment rate is falling even when the labour force participation rate has been falling.
With weak growth prospects, unemployment is likely to be the biggest challenge in the coming years.

How about inflation rate?

In the first 3 years, the current government greatly benefited from very low crude oil prices.
Oil prices (India basket) stayed close to the $110-a-barrel mark throughout 2011 to 2014.
It then fell rapidly to just $85 in 2015, coming to below (or around) $50 in 2017 and 2018.
The sudden, sharp fall in oil prices allowed the government to completely deal with the high retail inflation in the country.
But since the last quarter of 2019, India has been facing persistently high retail inflation.
Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge.
Going forward, inflation is a big worry for India.

What about fiscal deficit?

Fiscal deficit too is a concern.
In the Union Budget 2021, the government conceded that it had been underreporting the fiscal deficit by almost 2% of India’s GDP.
Even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated.

How strong is the Rupee as against the Dollar?

A US dollar was worth Rs 59 in 2014. Seven years later, it is closer to Rs 73.
The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.

What is the outlook on growth?

The biggest engine for growth in India is the expenditure by common people in their private capacity.
This “demand” for goods accounts for 55% of all GDP.
The per capita level of private consumption expenditure has fallen to levels last seen in 2016-17.
This means if the government does not help, India’s GDP may not revert to the pre-Covid trajectory for several years to come.

Source: The Indian Express