The Indian economy was in one of its worst slowdown phases even before the Covid-19 pandemic. GDP growth fell continuously for eight quarters (except for a flash of 0.08 percentage points between December 2018 and March 2019. It was 8.2% in March 2018 and had fallen to only 3.1 % in March 2020. In March there was only one week of lockdown (which would eventually last 68 days, albeit with some relaxations).
Even before the full force of the pandemic hit India (which was really in the April-June quarter in terms of livelihoods; and from July onwards in terms of lives with an increase in cases and deaths), the slowdown was already worse than that of the Indian economy. it happened in 2011-12.
Back then, quarterly GDP growth fell from 10.3% in March 2011 to 4.9% in June 2012. However, the economy started to recover after 2011-12. Annual GDP growth fell from 8.5% in 2010-11 to 5.2% in 2011-12. This contraction was followed by a strong recovery until 2016-17. This has not been the case this time and GDP growth has been continuously falling since 2017-18.
Both current and future growth drivers collapsed
Consumer demand is the biggest driver of economic growth in India. In 2019-20, Private Final Consumption Expenditure (PFCE) had a 57% share of India’s GDP. PFCE growth collapsed to 2.7% in the March 2020 quarter, the lowest since June 2012. As headwinds strengthened in consumer demand, companies began to sideline plans investment. This can be seen in gross fixed capital formation (GFCF) contracting at an increasing rate for three consecutive quarters through March 2020. A collapse in investment demand has adverse implications for the future growth potential of the economy. Only public spending acts as a countercyclical force to some extent.
The fall in nominal growth was greater
Nominal GDP growth in 2019-20 fell to just 7.2%, the lowest since 1975-76. The 2019-20 Union Budget assumed a nominal growth of 12%. Nominal GDP is crucial for revenue collection, as taxes are a fraction of nominal revenue. The sharp drop in nominal growth was one of the main reasons for a large deficit in tax collection in 2019-20. According to data from the Comptroller General of Accounts, which reports to the finance ministry, the gross tax revenue collection was only 81.6% of the budget estimates in 2019-20, the lowest since 2000-01.
To be sure, the corporate tax cut announced in September 2019 and the general slowdown in the economy exacerbated issues on the revenue collection front.
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