Indian Economy Falls of the Cliff

After sliding for eight quarters, that is, two years, India’s economic growth plunged dramatically by 22.8% in the April-June quarter of this year compared with the corresponding quarter of last year, according to the latest figures released by the government on Saturday. Compared with the previous January-March quarter, the contraction was 23.9%. 

All sectors of the economy, barring agriculture, showed a fall with manufacturing plummeting down by 39%, construction by 50%, trade, hospitality and communication by 47% and mining & quarrying by 23%. Agriculture showed a growth of 3.4%, on the back of a record rabi harvest and the belated exemption given to harvesting operations during the COVID-19 induced sudden lockdown.

As the chart below shows, economic growth had been falling since the beginning of 2018 and had shrunk to a tepid 3.1% in the preceding quarter (January-March 2020). 

The precipitous fall in the April-June quarter is the direct result of an ill-thought out and worse implemented countrywide lockdown that began from March 25, and continued till May, after which partial easing started. The lockdown was supposed to curb the spread of COVID-19 pandemic.

With this, the Indian government also gets the unenviable distinction of having led the country into the steepest economic decline among all major economies of the world. As shown in the chart below, the latest quarterly data from some of the countries mostly shows declines, except Australia, Russia and China. In the case of China, it was hit by the pandemic the first – in December 2019 – and its firm handling led to the country largely recovering to post an incredible 3.2% growth even as the rest of the world was sinking. Data is from OECD.

Lockdown Devastated the Economy

The lockdown was imposed on the country when coronavirus cases were less than 500 in the whole country. As it transpired, no preparation was made except the ‘shock and awe’ nature of the announcement by the Prime Minister himself through a nationwide telecast. 

The result was a complete and sudden freezing of all economic activity across the country. Agricultural operations were allowed to resume hurriedly on March 27, after the Home Ministry suddenly realised that the whole rabi crop was standing in the fields, ripe and ready for harvesting. Some other specific occupations were subsequently allowed to function, like fishing. These belated concessions have enabled the agriculture sector to post a 3.4% growth in this quarter.

The economic standstill hit the informal sector most devastatingly. Remember that 96% of Indians are employed in this (including agriculture). The current decline of -23% is likely to be revised downward because the data from informal manufacturing and services sectors has not yet been accounted for in these provisional figures, according to experts.

Today’s data also shows the staggering impact on other aspects of the economy. Private spending dipped by almost 27% indicating that families were either unable to spend on even basic items or did not have enough money to spend. This is not surprising because most Indians have meagre savings if at all, and are dependent on their earnings for survival, however low they may be. Private final consumption expenditure makes up 54.3% of GDP and is the key driver of the economy. In the corresponding quarter of last year, it was 56.4% of GDP.

Meanwhile, government expenditure increased by about 24% over the corresponding quarter of last year. But even after this increase, it made up only 18% of GDP, indicating that the government had largely left the people to their own fate. 

The government refused to intervene decisively in the crisis through increased spending and putting money in the hands of the people, as many other economies in the developed and developing world were doing. It is this crucial error – that has been the cornerstone of the Bharatiya Janata Party-led Narendra Modi government’s fiscal policy – that has finally caused the crushing devastation of the economy.

Investments as measured by Gross Fixed Capital Formation were decimated, dipping by nearly 48% in this quarter, and their share in GDP declining from nearly 29% to about 20%. This, too, shows the complete bankruptcy of the government policy followed since last year, of giving massive concessions to corporate entities and easing bank credit. The corporate tax cut of last year has been estimated to hand over Rs.1.45 lakh crore benefits to big business. This policy was continued during the pandemic and lakhs of crore worth of credit lines were opened up in the naïve belief that investments would pick up leading to more employment and thus a boost to the sinking economy. Nothing of the sort has happened, as the GDP data clearly shows. 

Understandably, exports too fell by 17% while imports fell by nearly 39%. Both these are a natural result of the global impact of the pandemic. 

Unemployment Rate

According to Centre for Monitoring Indian Economy or CMIE data based on a periodic sample survey, the jobless rate zoomed up to about 23% in April 2020, after which it recovered to about 11% in June and currently is at 8.3% as of end August. The recovery took place because by June, sowing for kharif season (mainly paddy) had started and thus the agriculture sector acted as a shock absorber, with huge numbers of returned migrant workers and the poor in rural areas working in the fields for whatever pittance they could get. This pushed up ‘employed’ numbers, though it didn’t put much extra earnings in the hands of the people. The current rate of joblessness appears to be the new normal and may actually worsen in the coming days.

A Bleak Future 

Prospects for the coming months do not look happy for the economy. No policy change has taken place to revive demand. Unemployment continues to remain higher than last year. No fresh investments are in the offing. The medium and small-scale sector has been destroyed and may not recover for several months, if at all. And agriculture cannot continue to bear the over-saturation it is currently experiencing. 

The pandemic, in the meantime, continues to rage with ever widening impact in India. Currently, with over 36 lakh total confirmed cases and over 64,000 deaths, India is fast heading to top the world. And the government continues to grope around, unable to deal with either the ravaging pandemic or the ravaged economy.