India’s gross domestic product (GDP) contracted by 23.9% in the June quarter, the largest contraction since the quarterly GDP figures were first released in 1996. It is also the most severe contraction among all the countries. great economies. Mint explains why.
How severe is the contraction of the Indian economy?
This is the first time that the economy has contracted since India began publishing quarterly GDP figures. The worst previous was from January to March 2009, when the economy grew by 0.2%. A complicating factor is the size of the informal sector, which accounts for more than 50% of the Indian economy. Measuring this is fraught with difficulties, but it would only have been exacerbated due to the pandemic. The National Statistics Office, which publishes the GDP data, pointed out that the confinement restrictions had an impact “on the data collection mechanisms”, which tells us that the contraction may be worse than the 23.9% reported.
How did the economy get so bad?
India’s blockade was the strictest in the world. In a rigor index created by the University of Oxford, India scored 100, the highest possible value, during the first half of April. This fell after mid-April and averaged slightly below 80 through the end of June. Due to the sidewalks, people could not go out to buy much and were limited to buying necessary items only for daily needs. With people unable to make purchases, businesses closed and this led to millions of migrant workers returning home. In addition, confusion over which goods and services are essential and which ones did not cause many supply chains to break down.
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Did the shutdown help contain the pandemic?
Given India’s limited state capacity, the restrictions did not lead the government to create systems to combat COVID. An increase of almost 80,000 daily cases is cause for concern. The spread of covid led people to cut back on consumption and increase savings. Between the end of March and the beginning of July, bank deposits increased by ₹5.1 trillion, from ₹1.01 trillion, in a similar period, a year ago.
What is the situation in other major countries?
In China, much of the pandemic spread between January and March, causing the economy to contract 6.8% in that quarter. In many western countries, too, a part of the covid-19 spread in the January-March quarter. As a result, the negative impact spread over two quarters. These countries are now in recession with a contraction in two consecutive quarters. In the case of India, the pandemic began to spread only after April. Furthermore, India’s contraction is not much worse than that of Spain and the United Kingdom.
Any other reason why India has done it wrong?
India’s fiscal position does not allow the government to get out of trouble with spending money. At the same time, printing too much money to finance excess public spending and boost growth, as is happening around the world, can create problems such as high inflation. Therefore, the Indian government has taken a conservative approach on this front. It’s worth noting that the Indian economy had slowed even before the pandemic hit.
Vivek Kaul is the author of Bad Money.
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