From contracting by an unprecedented 23.9 per cent to plunging into a technical recession, the trajectory of India’s economy saw a steep decline in 2020—primarily due to the Covid-19 pandemic. The staggering fall in its Gross Domestic Product (GDP) growth, which was already in a slowdown before the pandemic, reflected the total suspension of economic activity in the first quarter of this fiscal due to the series of lockdowns to stem the spread of virus.
The April-June quarter figure was not only India’s lowest growth rate since the country started reporting quarterly data in 1996, but also worse than the 21.7 per cent contraction reported by the UK economy in the June quarter—one of the sharpest GDP contraction among the top 20 global economies. To put things in perspective, the Indian economy has recorded an average of 7 per cent GDP growth each year since economic liberalisation in the early 1990s. This year, it is likely to turn turtle and contract by 7 per cent.
Barring agriculture, all other major indicators of growth in the economy were massively impacted. The worst affected sectors were construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%). It is pertinent to note that these are the sectors that generate the maximum new jobs in the country. In a scenario where each of these sectors is contracting so sharply — that is, their output and incomes are falling — it would lead to more and more people either losing jobs (decline in employment) or failing to get one (rise in unemployment).
Within the next three months, India entered a technical recession after GDP contracted for the second straight quarter through September. Although the 7.5 per cent contraction in the July-September quarter was a significant improvement over the 23.9 per cent contraction in the preceding quarter, the Indian economy remained one of the worst performers among major economies.
As compared to just one sector adding positive value in the first quarter, three sectors – agriculture, manufacturing and utilities – recorded positive growth in the second quarter. Moreover, in three of the remaining five sectors, the rate of decline decelerated.
With this, the GDP growth rate in April-September, the first half of this financial year, contracted by 15.7 per cent compared with a 4.8 per cent growth during the same period last year. In July-September last year, GDP had grown by 4.4 per cent.
All anecdotal evidence available, such as hundreds of thousands of stranded migrant workers across the country, suggested that the Medium, Small and Micro Enterprises (MSMEs) were the worst casualty of Covid-19 induced lockdown. Hence, the government laid its primary focus to lift the stressed MSME sector with its relief packages, especially a massive increase in credit guarantees to them. It essentially means that the government has resorted to taking over the credit risk of MSMEs should they want to remain in business. A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.
The Atmanirbhar Bharat (Self-reliant India) package, rolled out in several tranches to mitigate the biggest crisis since 1979, reinforced the ‘fiscal conservatism’ ideology of the government under Prime Minister Narendra Modi — rather than large cash transfers, the growth philosophy centres around creating an ecosystem that aids domestic demand, incentivises companies to generate jobs and boost production, and simultaneously extends benefits to those in severe distress, be it firms or individuals, reported our executive editor Vaidyanathan Iyer in this piece.
“The headline numbers — stimulus of Rs 29,87,641 crore or 15 per cent of GDP till date — are more for optics,” Iyer reported. “For instance, Sitharaman last month said the government’s contribution to the stimulus imparted so far was 9 per cent of GDP, the balance 6 per cent being attributed to the Reserve Bank of India (RBI). She put the size of Atmanirbhar Bharat 3.0 at Rs 2,65,080 crore. Even if one takes an optimistic account of the extra spend this year, it will add up to just Rs 1,18,200 crore, not even half of what she said. The Rs 1,45,980 crore expenditure in the form of production-linked incentives (PLIs) to 10 new sectors will be over five years, and likely kick in only next financial year.
But even the Rs 1,18,200 crore extra spending this year, by no means, is insignificant: it accounts for 0.6 per cent of GDP,” he continued.
The first package on March 27, the highlight of which was the Pradhan Mantri Garib Kalyan Yojana, totalled Rs 1.08 lakh crore; the second set of announcements made over five days in May added up another Rs 1.08 lakh crore to the Centre’s fiscal cost; the third package in October had a capital expenditure component of just Rs 37,000 crore. Put together, all Covid-19 relief measures would increase the Centre’s actual fiscal outgo by under 2 per cent of GDP in 2020-21.