Indian economy contracted by nearly a fourth or 24% in the Covid-19 lockdown months of April, May and June (Q1) this fiscal year. This is the deepest economic contraction on record. But the bad news doesn’t end here.
GDP at constant (2011-12) prices in Q1 of 2020-21 is estimated at Rs 26.90 lakh crore as against Rs 35.35 lakh crore in Q1 of 2019-20, showing a contraction of 23.9 per cent as compared to 5.2 per cent growth in Q1 2019-20,” a statement from the statistics ministry said.
According to government data, the biggest contraction was seen in three crucial pillars of the economy: 1) trade, hotels and transport which contracted by a whopping 47%; 2) construction sector, which shrank to half its size; 3) manufacturing was down by nearly a fourth at -23.3%. Agriculture sector remained the outlier with a growth of 3.4% during the quarter.
So what does a sharp, unprecedented contraction in GDP mean for the aam aadmi? A shrinking economy means job creation is not possible; also, existing jobs and incomes get severely impacted. As incomes get affected, the government and the Reserve Bank of India (RBI) need to step in to boost economic growth and ease the pain of the aam Aadmi. Are these two institutions doing enough?
DK Joshi, chief economist at ratings agency CRISIL, said he was expecting a fresh fiscal stimulus package from the government, equal to a percent of the GDP. He specifically mentioned vulnerable sections of the population and the Micro, Small & Medium Enterprises (MSME) sector to say that direct support should be offered by the government to these segments of the economy.
It is very likely that the GDP numbers could get revised further downward going forward due to challenges in data collection during the lockdown months. Our GDP calculation method uses formal sector activity as a proxy for informal sector activity. The coronavirus pandemic has affected the informal sector more than the formal sector, but this may not immediately reflect in the numbers. The informal sector accounts for roughly half of India’s GDP.