Big GDP slowdown will have serious long-term impact
It was well known that India’s economy would contract, but the National Statistical Office’s (NSO) data released on Monday evening was quite a shocker. The contraction of gross domestic product (GDP) for the first April-June quarter of FY2021 was a massive 23.9%, when most analysts had forecast a 19-20% de-growth. This is the biggest dive into negative territory since the country began releasing quarterly data since 1996. The obvious reason for the damage is the lockdowns imposed by the government to prevent the spread of the coronavirus pandemic. India’s performance was the worst among the G-20 countries, with our nearest rival, the UK, at -21.7%. In contrast, China and Brazil both registered positive growth of 3.2% and 1%, respectively for the quarter.
The Q1 GDP numbers are based on initial data and it is expected that the contraction could be more severe once the MSME sector’s data is factored in. The unorganised and small industries have been hit the hardest, and many have been wiped out. The lone bright spot is agriculture, which clocked a positive growth rate of 3.4% on the back of a bumper rabi crop. Even the pumping up of government spending by 16% failed to have any impact on the overall GDP numbers.
The implications are serious. The worst-performing sectors—manufacturing and construction, which slowed down a whopping 39.3% and 50.3% respectively—are also the biggest employers. The consequent loss of jobs we are seeing and the drift towards increased poverty is in evidence all round. The country also runs the risk of officially being in recession (defined as negative growth for two consecutive quarters) as the next July-September quarter is likely to see a contraction too. As it is, the July data for eight core sectors shows a year-on-year decline of 9.6%. The impact of shut and limping businesses will translate into poorer tax revenues, thereby giving less headroom for the government to intervene. It is therefore about time the government drops its brave face of ‘green shoots’, dismantles the lockdown inertia and gets the economy back on the rails.