India is likely to record the steepest economic growth slump ever recorded, just a couple of years after it earned the label of the world’s fastest growing major economy.
The country is expected to register a sharp drop in quarterly growth of 15-25 percent – the worst since such data was first released in India in 1996 – when the government releases official GDP data for the April-June quarter (Q1FY21) on Monday.
Many experts said that the coronavirus pandemic could not have hit the country at a more vulnerable stage, as India was already going through an economic slowdown. They fear that the economic devastation caused by the pandemic will affect India’s growth in the coming years.
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Millions of Indians have lost their jobs and dozens of small and medium-sized businesses have been struggling since the country went through a strict nationwide shutdown beginning March 25.
While the government has been quick to adopt several measures, including a nearly $ 21 billion package to help in the economic revival, it has not addressed key concerns such as falling demand and rising inflation.
Demand shock
Reversing the massive drop in consumption appears to be one of the biggest challenges for the government right now. While demand was already declining in India since last year, the pandemic-induced lockdown worsened consumption prospects.
Many economists have clearly stated that the government needs to announce more stimulus measures aimed directly at boosting demand, as this is the only way to revive the economy.
If demand remains subdued for the rest of the year, the annual growth rate is also likely to contract by more than 5%, according to recent projections.
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While a recovery in rural demand is expected to improve consumption, experts suggest it would hardly help boost growth if demand does not return to pre-pandemic levels.
In its latest annual report, RBI has mentioned that it will take “a long time” to regain the momentum lost due to the pandemic.
Although the RBI declined to provide estimates of GDP for the current year, its report suggests that GDP will remain subdued for more than a year if concerns about demand are not addressed.
Other growth concerns
The coronavirus pandemic has not only affected demand, but has also amplified other problems that were weakening the Indian economy, including high public debt and weaker tax collections.
A spike in inflation, mainly due to rising food prices, has also become another major concern for Indian households. Millions of households spend less on basic food items due to the sudden increase.
Retail inflation was recorded at 6.93 percent in July, which is higher than the RBI’s medium-term target. It is expected to be even higher in August due to the increase in vegetable prices due to excess rainfall.
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India’s manufacturing and service activity has also shown no signs of improvement. The country’s decline in manufacturing activity deepened in July due to renewed closings, according to the Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit.
The outlook for manufacturing activity was recorded at 46.0 in July, still below the 50 level that separates growth from expansion. Factory production has been below 50 for four consecutive months.
The situation was the same in the Indian service industry, which contracted for the fifth consecutive month in July.
The considerably lower tax collection during the year has worsened the situation of the Indian economy.
Finance Minister Nirmala Sitharaman recently said that an ‘act of God’ has caused a contraction in the economy, adding that the government will not be able to pay the GST compensation to the states.
Although his comment on ‘Act of God’ the citizens did not like himSitharaman’s comments were an indication of how badly the Indian economy has been affected by the coronavirus pandemic.
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While some projections show that the Indian economy will recover in the second half of the year, most economists are not convinced of the absence of direct fiscal support from the government.
Even if suppressed demand leads to a recovery after the pandemic subsides, deep structural problems like high public debt are expected to offset India’s GDP growth in the years to come.
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