How did India's GDP crash by -23.9%

Updated: Oct 18, 2020

Today I don't want to use any time in greeting everyone, we have something serious to talk today so let's begin.

INTRODUCTION

Let's start with the projection.

Source: International Monetary Fund

This was released by IMF in June, which says that India's GDP growth rate will be about -4.5% in 2020. Yes, It says negative growth, we have seen this for the first time after 1979.

Source: World Bank



When we look at the latest reports, the condition is even worse.

Credits: ABP NEWS

Looking at the graphs, our country has not done the best, rather the worst in the G20.

Source: International Monetary Fund

Economics believes that this may not be the real numbers as we haven't counted the unauthorized sector which has taken the biggest hit.


WHY DOES THIS MATTER?


This condition will directly affect the poor, with every percentage increase in our GDP growth rate, we can help about 30 lakh people to get out of Poverty. A bad economic performance is a lost opportunity for helping people who are suffering from poverty.

According to the data of Centre for Monitoring Indian Economy, about 12 crore people lost their jobs during the time of COVID. But many of them have got some kind of earing source back, mostly in the Informal Sector. The biggest hit is on the people who had salaried jobs, about 1.9 million of them lost their jobs

Source: BBC

If we look age-wise, people between the age of 20-29 have lost maximum jobs.


In an Interview given The Wall Street Journal, an electronics shop owner stated that people have stopped buying a new mobile phone but are rather asking the shop to repair their old once.

Source: The Wall Street Journal

Maruti Suzuki the biggest automaker in our country, told that they did not sell a single car in April.

Source: Maruti Suzuki

Now we know why does this matters. So, let's understand what are the effects of the lockdown on the Indian Economy.

IMPACT OF LOCKDOWN ON THE ECONOMY.

DISCLAIMER: By no means I am saying that the lockdown was bad for the country, in my opinion, the lockdown was the only way to stop the outbreak of COVID cases in our country.

In one of my previous post, about GDP We talked that GDP has four parts:

1. Consumption

2. Investment


3. Net Exports

4. Government Expenditure

Our GDP smacked because two of these four parts have crashed.

Source: Ministry of Statistics and Programme Implementation

Now let's talk about each of the variables in detail. 1. Consumption Due to the lockdown, people were not allowed to move out of their houses because of which the consumption of people went down, eventually crashing one of the four variables.


This argument can also be backed by the data of Google Mobility data, which I have linked in the form of pdf below.

Google Mobility Data
.pdf
Download PDF • 411KB

Moreover, due to the lockdown people lost their jobs and their purchasing power decreased due to which their consumption went down.

2. Investments

It is pretty clear that when people don't want to step out of there house, why would someone invest a huge amount or would set up a factor or expand its business.


So, the Investment also went down.

3. Net Exports

Source: Ministry of Statistics and Programme Implementation

This graph shows that our New Exports have gone up, but actually, our exports haven't gone up rather our Imports have drastically decreased.


The decrease in Imports is broad because of two points


1. Oil Imports

We need to understand that India is a very big importer of Oil. Due to the lockdown, people are not moving and the factorize are shut so we are not importing that much Oil as we used to. Moreover, due to the pandemic, Oil prices have gone down. So Oil Imports are not contributing as much they used to.


2. All Other Imports

All the other imports have also fallen as the people have lost their purchasing power.

Due to which our Imports have gone down.


Now let's look at Government expenditure.


4. Government Expenditure. Here is some positive news, Our Government Expenditure has gone up. Since the private sector is silent, the only way for our Economy to do go is that if Government Spending increase, which is happening. This is clearly seen by this Graph:

Source: Centre for Monitoring Indian Economy

If there were no Government Expenditures Our GDP growth rate would have been a catastrophic -29.3% Now you may be thinking that because of the lockdown, our Economy is suffering and when the Lockdown is completely lifted we will get back to normal terms. This is more or less correct. We have a historical proof for this too. In 1918, the Spanish flu or the Influenza virus had hit us, the conditions were pretty similar to that of today. We recovered with flying colours when the conditioned were normalized then. In this Graph, the GDP growth rates had been plotted for the past 120 years.

We can clearly see that from 1918 to 1919 the GDP growth rate went up by 20 percent. The probably that will be the case with COVID-19 too.

This is probably why the IMF has predicted that next year our GDP growth rate would be 6%

Source: International Monetary Fund

But this doesn't mean that our economic recovery from COVID will be easy. As we have already seen from this Graph,

Source: Ministry of Statistics and Programme Implementation

Consumption and Investments are not going to help our GDP Government is the only hope. And how can the Government do this? By building even more roads, bridges, etc. or by giving money directly in the hands of the people by schemes like Pradhan Mantri Jan Dhan Yojana, etc. By this, we can partially recover. What's the problem with this? doing this sounds pretty easy. On paper, all this looks very simple but the major problem is the Government also does not have the money to invest more in building roads, etc.

Source: Live Mint



Since the Government's income is less than expected, there are high chances that next year the tax rated will again go up. Moreover, like us government also takes loans to facilitate their expenses.

But still, they can take loans to a certain extent only, after that the only way ahead is to increase their income.

Source: McKinsey

In a report by McKinsey, they suggested that by simplifying the GST and Privatising the state-owned companies the government can Increase their Income drastically.

SOLUTION It is very simple, to solve an issue like this we first need to admit that there is a problem. The government needs to look at avenues like increasing the tax rates so that they can spend even more, give money directly in the hands of the poor so that our consumption increases and hope the more companies like Reliance come up so that the Investment in our country goes up.


Thank You for reading the whole post, I know it was a long one. Hope you liked it, if so please give it a like, share it with your friends. Don't forget to follow us on Instagram. We will meet again next week, until then GOOD-BYE

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