The recent data released by the National Statistical Office (NSO) of India reveals a massive contraction in the country’s Gross Domestic Product (GDP) growth. In comparison to the same period in 2019, the GDP growth rate plummeted by a staggering 23.9% in the first quarter of the 2020 fiscal year (April-June). This drastic decrease marks the sharpest contraction since India began recording quarterly data back in 1996.
Along with the GDP, the country’s Gross Value Added (GVA) growth rate also suffered a decline of 22.8% during the same quarter. The GDP signifies the total value of all goods and services produced annually within a country, while the GVA combines the GDP with subsidies and taxes’ net value prevalent in the economy.
Analysis of Sector Wise Data
According to the NSO’s data, certain sectors have been affected more than others. Construction, manufacturing, trade, hotels, other services, and mining were the hardest hit, recording contractions of 50.3%, 39.3%,47.0% and 23% respectively. The only sector that exhibited any growth amid these circumstances was agriculture, with a modest positive growth of 3.4%.
Factors Contributing to GDP Contraction
Private consumption, demand generated by private sector businesses, government-generated demand, and exports are typically the four engines contributing to GDP growth in any economy. However, due to the pandemic’s impact, private consumption has reduced by 27%. Investment from private sector businesses has seen a decline of 47%. Net export demand has actually turned positive because the country’s imports decreased more significantly than its exports.
Implications of The GDP Contraction
This economic situation will inevitably affect the job market, particularly in the hardest hit sectors like construction and manufacturing. With these sectors contracting, more people are bound to lose jobs while others fail to secure new ones, increasing unemployment rates.
Small Scale and Informal Sectors Hard Hit
The small-scale sector and informal sector have been even more grievously affected by the economic crisis than the organized sector. This is not reflected in the quarterly GDP numbers, further deepening the actual impact of the economic crisis.
Banking Sector’s Looming Defaults
After the moratorium ends, potential defaults in the banking sector will add to the woes of the banking industry, affecting lending. Concerns regarding household debt are also rising due to stagnant incomes, salary cuts, and job losses.
Possible Solutions To Revive The Economy
As individuals’ incomes fall, consumption reduces, and businesses stop investing, the government must step in to give the economy a much-needed push. Increased government spending can help revive the economy in the short to medium term. Measures suggested by McKinsey Global Institute recommend that the Indian Government adopt certain strategies to raise an additional 3.5 % of the GDP. These include digitization and automation, privatisation, improving infrastructure, efficient financing, and the creation of a ‘bad bank’.