India's historic GDP contraction in the first quarter of 2020-21 has been primarily attributed to the devastation caused by the novel coronavirus pandemic. However, there are several other economic factors that also contributed to the dismal growth performance.
Official data released by the National Statistics Office (NSO) on Monday showed how the period from April-June - the months when India was under a strict lockdown - proved to be a disaster for the country's already slowing economy.
While the sudden Covid-19 shock played a major role in paralysing growth since April, weak economic fundamentals had eroded the country's financial stability even before the pandemic.
FALLING SINCE 2019
Economic growth was rapidly falling since the beginning of 2019 due to a plethora of economic issues including a weak banking sector, liquidity crisis, declining investments and a high level of NPAs.
Sectors such as real estate, construction, and manufacturing were declining fast before the pandemic completely brought the economy to a standstill. The disruptions triggered by the pandemic will make matters worse for these sectors as the economy faces its deepest recession on record.
The depth of India's economic contraction in the first quarter can be determined by the fact that only two indicators of growth managed to stay positive - agriculture and government consumption expenditure.
POSITIVES
The contribution of agriculture to GDP grew 3.4 per cent in April-June quarter, higher than the 3 per cent recorded in the same quarter in 2019-20.
Another positive indicator was the increase in government's final consumption expenditure, which grew from 12.3 per cent in 2019-20 to 11.8 per cent in 2020-21.
Without these, the economy would have sunk deeper and the recovery mission would have become much more difficult.
As the government formulates its next move to bring the economic back on track, it needs to focus on core fundamentals that were weakening before the pandemic and lost immunity completely after the virus-induced lockdown brought the country to a standstill.
LOOKING BACK AND MOVING FORWARD
The financial impact of the pandemic is expected to reduce as the government progresses with its plan to unlock the economy further. Most businesses have got a green signal to reopen and factory activity data in August has grown for the first time in five months.
This, however, is no signal that the economy will witness a V-shaped recovery, as claimed by Chief Economic Advisor KV Subramanian.
Many economist believe that that GDP contraction of -23.9 per cent is grossly underestimated as data collection efforts were hit hard during the pandemic. Revised growth estimates are likely to provide a more accurate picture at a later stage.
It may be noted that India has emerged as the second-worst performer after the US in terms of GDP contraction among major economies. The UK is the only other country where GDP contraction was recorded above 20 per cent.
Both UK and US are likely to see improvement in fundamental indicators going forward as both rushed in with direct stimulus measures after the Covid-19 pandemic struck.
For instance, a job security scheme was introduced by both the governments and people who had lost their jobs or furloughed during the pandemic were eligible to get a part of their compensation.
INDIAN PACKAGE
On the contrary, India's package of nearly Rs 21 lakh crore primarily helped support the poorer population and small businesses, but fell short of shielding crores of salaried people who lost jobs.
Nearly 1.8 crore salaried individuals have lost their jobs during to the ongoing pandemic, but all they got as help was a moratorium on loan and EMI payments. It is worth mentioning that India's salaried class accounts for a bulk of the non-government expenditure growth - something that has been severely hit during the lockdown.
India's stimulus package also put more pressure on the banking sector that was already in deep trouble. For instance, a bulk of the help offered as part of the stimulus package was in form of government guaranteed loans that businesses could take from banks.
Indian banks were already stressed due to their large share of non-performing assets. The loan moratorium announced for six months dealt another heavy blow to banks.
Many bankers and economists are now worried about the declining situation of India's banking and financial sector, which is expected to play a key role in the country's recovery after the economic comes out of a coma.
DEMAND, DIRECT MEASURES, JOB CREATION
The severity of the GDP contraction is likely to reduce in the next quarter, but it would be hard for India to push itself out of the contraction zone without direct measures aimed at creating jobs.
Improved consumer sentiment is a key aspect of non-government expenditure growth and that can only happen if more jobs are created. At present, a demand vacuum seems to have been created in India, where the middle income group has significantly reduced spending on things other than essential commodities.
"As expected, growth contracted sharply in the June quarter. Investment demand recorded a 47% decline, while private consumption recorded a contraction of nearly 20%. With a contraction of 20.6% y/y, service sector was a key drag on the growth," Shashank Mendiratta, an economist at IBM, told news agency Reuters.
The government also needs to revisit its revival plan for MSMEs and other small business - a majority of which have shut shop due to the pandemic shock. Many are not willing to opt for the loans as their businesses are already struggling.
Aditi Nayar, Principal Economist, ICRA, indicated that incoming data on MSMEs and less-formal sectors could result in deeper contraction when revised growth data is released.
However, economists also agree that the government does not have much leeway and hence will have to act with caution, according to Suvodeep Rakshit, a senior economist at Kotak Institutional Equities.
"The choice for the government will be on whether the consumption or the investment side needs to be pushed. Given the limited fiscal space and the need to stimulate a more durable growth, the growth recovery will be gradual and is likely to continue into 1HFY22," he told Reuters.
Economists have collectively questioned the pattern in which the government allocated its stimulus response to the pandemic. Many believe that it was a sub-optimal response and fear that the it could lead to a period of stagnation after initial recovery due to easing of lockdowns.
While rural activity pickup is a good sign for the economy, the government needs to either push for more investments in core job creating sectors or focus on direct policy measures to boost demand. In the absence of additional stimulus, India may encounter years of slow growth.
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