GDP contracts at the sharpest rate on record
GDP contraction is not an alien concept in India. The last time India actually did see GDP contraction was during the Janata Party regime in fiscal year 1979-80. That is a full 40 years back and in short, it is just a distant memory. Let us look at how quarterly GDP panned out in the last few quarters.
Firstly, the real problem is absolute and not relative
First and foremost, it must be understood that when the GDP contracts by (-23.9%), the problem is not with the percentage fall but with the absolute fall. For an economy like India it could have larger implications. We are talking about implications in terms of output, user industry impact, supplier industry impact and jobs.
According to detailed data put out by the National Statistical Office (MOSPI), GDP at constant rates (real GDP) for the Jun-20 quarter stood at Rs26,90,000cr. That is 23.9% lower than the real GDP of Rs35,35,000cr reported for the Jun-19 quarter. The GDP has fallen in absolute terms by Rs8.45,000cr.
We are focusing on the absolute reduction on GDP in the Jun-20 quarter because that has multiplier impacts. When a particular sector contracts, it creates demand shortfall for the supplier industries that provide inputs. Then there are user industries which get constrained by supply chain bottlenecks. There are costs in the form of labour migration, employees being laid off and a consequent fall in spending power. All these will have long term impact on consumer demand and the capacity of the economy to bounce back.
Why we say that farmers saved the day
We started off saying that the farmers may have actually saved the day for the Indian economy in the Jun-20 quarter. Here is why.
There are some interesting inferences that follow from the chart above. The above numbersare GVA or gross value added. That is GDP growth excluding the impact of tax and subsidies, which is why it differs from real GDP. For segmental comparison, GVA is more reliable.
• There was little surprise in the two worst affected segments. Trade and hotels have been badly hit by the lockdown and the lag effect is likely to continue for longer. Construction has been hit by a combination of supply chain issues, absence of labour and weak demand.
• What is slightly perturbing is that the segment of public servicesand defence has shown contraction of (-10.3%). Traditionally, government-driven spending has been the trigger for growth but clearly the fiscal pressures on the government arestarting to gradually manifest.
• Manufacturing, which has been the big focus of Atma Nirbhar Plan, contracted by (-39.3%) in the Jun-20 quarter. However, the high frequency data coming from the core sector and the PMI manufacturing post June show that improvement in output is real and palpable. That means; manufacturing momentum may get better Q2.
Between here and growth, there aresteep challenges
Agriculture was the good news in a bad quarter, but agriculture accounts for just about 15% of the GDP and there is only so much traction it can provide. Industry accounts for 26% and services account for the balance 59% of GDP. The real traction will have to come from industry and services. We are emphasizing industry because it has a multiplier impact on the growth of services.
The bigger challenge for the Indian economy will be to revive the animal spirits of growth. June quarter is gone and most likely we will see GDP contraction in September quarter too. The big challenge for the government is, what after that. How to design a game plan to exit lockdowns systematically and give a boost to economic activity? That will be the big challenge for India Inc and the government will have to take the lead!