India’s GDP In An Abysmal State: Economy Contracts By 23.9%

The Indian Economy witnessed a record contraction of 23.9% in Q1. Will the Economy revive or Is the worst phase yet to come?

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Indian economy posted it’s steepest contraction in decades as it fell by 23.9% in the April-June period quarter. Official data revealed by the Union ministry of statistics and programme implementation showed how the Indian economy suffered in the current fiscal year because of the COVID-19 pandemic-induced strict lockdowns.WireX August Download

India’s economy was already faltering even before the pandemic struck. When the COVID-19 restrictions led to disruption across businesses leading to loss of consumption and investment and job shortage, the growth rate in Q4 FY20 was at 3.1%. In India, the unemployment rate reached 27.1 per cent in early May, as nearly 122 million Indians lost their jobs between March and April. Furthermore, the current academic year also suffered with more than 37.5 million students having been out of campus.

Since India began maintaining quarterly records in 1996, this is the first time the economy suffered a contraction in the first quarter of a fiscal year. Earlier, the GDP showed a modest boost of 3.1% in the January-March. With the April-June quarter facing most of the 68-days strict national lockdown, India’s economic contraction is the sharpest among major world economies. China showed a rise of 3.2% across all sectors after posting a contraction earlier in the January-March quarter.
The Agriculture sector is the only exception which showed an annual rise of 3.4% in the June quarter compared with a growth of 3% in the same quarter previous year.

The services sector, which accounts for nearly 60% of the Indian Economy reported a slump of 0.6% in the June quarter, compared to a 4.4% growth in the previous quarter. The Service industry has suffered the most due to the strict nation-wide lockdown with hotels, restaurants, hospitality and airlines, all services operating for survival.
The pandemic induced lockdown made it worse for the manufacturing and the construction sector. Recession deepened across these sectors as they reported a contraction for two or more quarters. The Manufacturing sector witnessed a contraction for the fourth consecutive quarter as it fell by 39.9% while the construction sector downed 50.3% during the three months.

Private Consumption, the most important factor fueling almost all the economic sectors, fell by 24.5% in the first quarter from 8.5% increase in the same quarter previous year. Trade, Transport and Communication records the second highest slump with a decline of 47% in the June quarter. According to a Care Ratings analysis, investment growth witnessed a sharp decrease of 47.9% in the June quarter.

The role of the government in trying to revive the economy is highlighted by the sharp rise in government consumption that saw a rise of 20.2% in the June Quarter as compared to 9.5% in the same quarter last year.
With the government and the Reserve Bank of India (RBI) announcing many measures to provide respite to different sectors and borrowers, including a Rs 21 lakh crore economic package and 1.15 percentage points reduction in policy rates, the economic contraction is yet expected to continue into the second quarter with many states introducing intermittent lockdows to curb the spread of the pandemic.

“Consumption demand and investments which are necessary to propel the economy would continue to be tepid and is unlikely to see a noteworthy improvement during the course of the year. Government spending would have to do the heavy lifting,”said Madan Sabnavis, chief economist at Care Ratings.

“Although the higher growth in the agriculture sector and consequently rural demand would support the domestic economy, it would not be sufficient to compensate for the decline in urban demand and growth. We project the country’s GDP to contract by around 6.4-6.5% in FY21,” Sabnavis said.

WireX August Download

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