What India’s historic GDP contraction means for the future?


The GDP is at its worst low since 1996 — shrank by 23.9 percent to be precise. It has been found that the contraction between the months of April and June have been the most devastating globally, some credit can be given to the Coronavirus pandemic. This shows us the massive effect the pandemic and the subsequent lockdown has had on our country or even around the world. The last time India had faced a full-year contraction in its real GDP was in 1980.

There is also the nominal GDP, which has also contracted by 22.6 percent and point towards the fact that the entire Indian economy could shrink this fiscal, something that the nation has never have to deal with. So, what will the GDP contraction lead to, do we know what the future holds for us?

How bad is the GDP contraction?

Former Prime Minister Manmohan Singh had explained a few weeks ago about the difference between the real GDP contracting and the nominal GDP too. He had highlighted that economists and experts have concerns that the nominal GDP might also contract this year making it difficult for the nation to come out of the slump. “if it happens, it will be the first time in independent India. I hope the consensus is wrong,” he had said. A contraction in the nominal GDP will have massive repercussions on tax collections in 2020, lead to more job losses and unemployment, wages being cut, and a massive fiscal deficit that will later need to be fulfilled by even larger borrowings.
Lack of investment has led to growth getting stunted for some time now. The growth numbers we see today writes RK Pattnaik, former central banker and a faculty member at SPJIMR “are a mirror to negative investment demand coupled with a collapse in industrial growth. It is pertinent to in this regard that this development is corroborated by the Q1 production data measured in terms of Index of Industrial Production (IIP) released by the NSO earlier on August 11. As may be seen from the IIP data, the production of capital goods representing the indicators of investment demand declined by 36.7 percent in June, and cumulatively this led to minus 64.4 percent growth in April-June 2020.”

While a ‘V-shaped’ recovery is a distant dream, experts have touted that a ‘U-shaped’ recovery might be probable. Govind Rao, a member of the 14th finance commission and currently the chief economic adviser at Brickwork Ratings, said: “The economy has certainly entered a recession phase as the second-quarter GDP number is also most likely going to be negative. However, the pace of contraction may be slower in Q2 than in Q1 due to the lower base, which will wane to some extent, and the gradual lifting of the lockdown in areas and sectors, which is likely to improve economic activity.”
DK Srivastava, the chief policy adviser at EY India, said: “The first-quarter numbers highlight an extremely challenging outlook for the Indian economy with only one sector — agriculture — showing positive growth. Signals are that FY21 is likely to end in a net contraction. With nominal GDP also showing negative growth of about (-) 23 percent n 1QFY21, tax revenues are also likely to contract sharply in the year as a whole. The Indian economy has clearly landed in a severe vicious cycle with the need to stimulate demand by the government is at its weakest. Without stimulating private consumption and investment demand, it may be difficult to arrest this downward momentum.”

What might happen due to the GDP contraction?

The unending pandemic is an integral factor in jeopardizing the economy and its recovery more than it has already done. A recent SBI Ecowrap research report has estimated that India’s real GDP will contract 10.9 percent in FY21. It had earlier put the figure at -6.8 percent. “Our preliminary estimate indicates that all the four quarters of FY21 will exhibit negative real GDP growth, and the decline of full-year growth will likely be in double digits (around 10.9 percent),” the research report stated.

If the growth rate shows no sign of improvement, the major challenge in the next 10 years will be generating a sufficient amount of jobs to support a growing population in the country. Curbing unemployment and coming up with adequate jobs was always a pain point for India since the economy was already growing at a slower pace of just five percent since last year. With the expected sharp GDP contraction following the pandemic, unemployment rates are expected to grow in the absence of enough jobs. A recent Mckinsey Global Institute report has pointed out that India’s GDP will need to arise at 8 to 8.5 percent per year over the next decade to create 90 million or nine crore non-farm jobs. An 8-8.5 percent growth is actually a lot to attain and is double of what India achieved in 2019-20.
The report has also suggested that the nation will have to create at least 10-12 million jobs annually in order to absorb the growing number of young professionals — something that seems impossible at this time and the current growth rate that we are looking at. If the country is lacking in strategies to assess this growth issue immediately, it could actually end up affecting a decade of income, stunted salaries, and deteriorating quality of life, the report also added.

India’s dream of becoming a 5 trillion dollar economy looks quite far-fetched now. If the government doesn’t buckle up now and take significant steps, the nation might also miss out on its chance to become a global economic superpower in the near future.

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