The GDP Fall of India
Government estimates launched on Monday show that India’s GDP contracted by using 7.3% in 2020-21. While the pandemic has hit a boom in nations across the world, several tendencies over the remaining decade show that the Indian financial system was once already worsening in the years earlier than Covid-19.
Written By Udit Misra | New Delhi |
Updated: June 1, 2021 6:03:01 pm
On Monday, the Indian authorities released its modern estimates of financial increase for the remaining monetary 12 months that ended in March 2021. India’s Gross Domestic Product (GDP) gotten smaller by way of 7.3% in 2020-21. To apprehend this fall in perspective, be mindful that between the early Nineties until the pandemic hit the country, India grew at an average of round 7% each and every year.
The other way would be to appear at this contraction in the context of what has been going on to the Indian financial system over the last decade — and extra precisely over the remaining seven years, because the Prime Minister Narendra Modi-led authorities just done its seventh anniversary remaining week.
Seen in this context, the contemporary GDP facts suggest that it is not an outlier. Instead, if one looked at some of the most important variables in the data, India’s financial system had been regularly worsening in the course of the present day regime even before the Covid-19 pandemic.
Perhaps the fantastic way to arrive at such a conclusion is to look at the so-called “fundamentals of the economy”. This phrase in actuality refers to a bunch of economy-wide variables that grant the most robust measure of an economy’s health. That is why, all through intervals of monetary upheaval, you frequently hear political leaders reassure the public that the “fundamentals of the economy are sound”.
Let’s look at the most important ones.
Gross Domestic Product
Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.
Let us look at Chart 1, provided in the Reserve Bank of India or RBI’s Annual Report for FY21 that was released on May 27. The chart maps the turning points in India’s growth story.
Chart 1
Source: RBI staff estimates
Two will be noticeable. In the aftermath of the global financial crisis, the Indian economy began to recover in March 2013. Today, more than a year before the government took the initiative. But more importantly, these recovered have turned into an aging slowdown in growth since the third quarter of 2016-17 (October-December). RBI did not reveal this On the night of November 8, 2016, the government's decision to revise 86% of the Indian currency downwards appeared to many experts in the wake of a downward spiral in India's growth. I will. The spillover effect of goods and service taxes (GST), which are harmoniously and poorly designed and enforced in a hurry through an economy that is already suffering from huge non-performing loans in the financial system, spreads, and the GDP growth rate starts from 8% of FY17. It has fallen steadily. 4% of FY20 just before Covid-19 hit the United States. When GDP growth in January 2020 fell to its lowest level in 42 years (in terms of nominal GDP), the Prime Minister was optimistic. reflex ability" As the analysis of key variables shows, the fundamentals of the Indian economy were already quite weak even in January of last year, well before the pandemic. For example, looking at the recent past (Chart 2), India's GDP growth pattern was similar to a "reverse V" even before Covid-19 hit the economy.
Chart 2 and 3
GDP per capita
Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy. As the red curve in Chart 3 (above) shows, at a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started. As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.
Unemployment rate
This is probably the worst performance indicator in India. The first is the news that even according to the government's own survey, India's unemployment rate reached a 45-year high in fiscal year 2017-18. This is the second year after demonetization and the year the GST was implemented. Then came the news in 2019 that between 2012 and 2018, the total number of employees dropped by 9 million.
This is the first example of a decline in total employment in the history of independent India. Relative to the unemployment rate standard of 2% to 3%, in the years leading up to the start of Covid-19, India began to routinely see the unemployment rate approaching 6% -7%. Of course, the pandemic has made the situation worse.
What makes unemployment in India even more concerning is that even if the labor force participation rate (which reflects the proportion of the population that is even looking for work) has been declining, it is still happening. Due to poor growth prospects, unemployment may be the government's biggest headache left in the current period
In the first three years, the government greatly benefited from very low crude oil prices. After staying close to the $110-a-barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $85 in 2015 and further to below (or around) $50 in 2017 and 2018.
On the one hand, the sudden and sharp fall in oil prices allowed the government to completely tame the high retail inflation in the country, while on the other, it allowed the government to collect additional taxes on fuel.
But since the last quarter of 2019, India has been facing persistently high retail inflation. Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge. India was one of few countries — among comparable advanced and emerging market economies — that has witnessed inflation trending consistently above or near the RBI’s threshold since late 2019.
Going forward, inflation is a big worry for India. It is for this reason that the RBI is expected to avoid cutting interest rates (despite faltering growth) in its upcoming credit policy review on June 4.
Fiscal deficit
The fiscal deficit is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.
Generally, excessive debt has two negative effects. One is that government loans reduce the investment funds available for private companies to borrow (this is called "squeezing out the private sector"); this also increases the price of such loans (that is, interest rates). Second, the additional loans increase the total debt that the government must repay. Higher debt levels mean that a larger proportion of government taxes will be used to repay past loans.
For the same reason, higher debt levels also mean higher tax levels. On the surface, India's fiscal deficit is only slightly higher than the established standard, but in fact, even before Covid-19, India's fiscal deficit far exceeded the level announced by the government. The government admitted in the federal budget for the current fiscal year that it has been underestimating the fiscal deficit, which accounts for around 2% of India's GDP.
Also in Explained |Business sentiment at a new low: What FICCI survey shows
Rupee vs dollar
The exchange rate of a national currency to the US dollar is a powerful metric to capture the relative strength of the economy. One US dollar was worth Rs 59 when the government took over in 2014. Seven years later, it's almost Rs 73. The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.
These were some, not all, of the metrics that often qualify as the fundamentals of an economy.
What’s the outlook on growth?
The biggest engine for growth in India is the expenditure by common people in their private capacity. This “demand” for goods accounts for 55% of all GDP. In Chart 3, the blue curve shows the per capita level of this private consumption expenditure, which has fallen to levels last seen in 2016-17. This means if the government does not help, India’s GDP may not revert to the pre-Covid trajectory for several years to come. It is for this reason that the latest GDP should not be viewed as an outlier.
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