Contracting India

The Indian economy contracted by a drastic 23.9% in the April-June quarter of 2020-21 which is being stated as the most drastic fall in the Indian economy. What is more worrisome is the fact that this diminution is the worst amongst the world’s top economies and is an issue of immense concern for a major developing economy like India. The extent of the damage is expected to be manifold with the informal sector being the worst hit and revival looking like a prolonged journey. This can be supported by a statement made by Professor Arun Kumar of New Delhi’s Institute of Social Sciences wherein he estimates the economic slide to be a negative 40% if the informal sector is taken into account. While the outbreak of COVID-19 is the prime cause of the gloomy economy, the already prevalent global economic slowdown and side-effects of the trade war cannot be overlooked. 

On March 25, 2020, India declared a complete national lockdown which was the world’s largest lockdown owing to the widespread pandemic. Apart from the limited movement of essential commodities, all businesses either came to a standstill with bleak immunity to have a revival spurt or they got wiped out. With people losing jobs in various sectors of the economy, the rise in unemployment has only deepened the strain. Experts analyse the figures and the trend as the onset of India’s largest recession since 1996. 

For emerging economies, the prospects of a speedy recovery seem to be dim as per the International Monetary Fund (IMF), but the scenario is worst for India as the GDP contracted by a way larger margin than what was actually predicted. Adding to the crisis is the prediction by IMF which forecasted a contraction of 10.3% in the GDP in the fiscal year 2021, against the Central Bank’s prediction of 9.5%. The forecast in itself brings about a cloud of panic as this rate was predicted to be 4.5% in June 2020, the 5.8% leap is a near-indigestible figure for an economy of a great significance like that of India. The global economic significance that the nation has managed to engrave and give a stiff fight to its neighbour finds itself dwindling as China’s road to revival is far stronger than what was anticipated. While households and small businesses stand wrecked as an aftermath of the lockdown, the government has been continuously chalking out strategies to boost demand as a measure to curtail the downfall of one of the world’s major economies.

The quake in the economy shook all the sectors but the major contributors like construction, manufacturing and transportation were the worst hit. While agriculture did fairly well with an unexpected growth of 3.4%, it wasn’t strong enough to nullify the 39.3% contraction in the manufacturing sector, 23.3% in the mining sector, and 50.3% in the construction sector. Not only this, transportation along with trade, hotels, communication and broadcasting shrank by 47% in the first quarter. The pandemic forced the export shipments to dry out, people were locked at home with no eating out and no tourism. Businessmen had to either shut down their trade or put it to a halt. The prostration of the real-estate sector cannot be overlooked, which is clearly evident from the sharp fall in the rates and lack of demand for property. Along with this, tenants began emptying spaces already rented-out, as many started moving back to native places owing to no job in hand. Hence, the sectors that managed to keep themselves afloat in these troubled times could not stop the others from slipping down a sharp cliff. 

On the other hand, the most profound problem that the Indian economy faces is that of its informal sector. While India’s large and a considerable proportion of workforce adjusts itself in the informal sector, fled back to its hometowns with a lesser impetus to come back. With no food to fill their stomachs, this downtrodden section of the society finds itself in a quagmire. 

The road to revival is definitely a tough one, but the government is gearing up itself in all and every way possible. With a systematic unlocking of the economy, the growth is finding its way back. While the experts call for a need to introduce a fresh stimulus package for the middle class, the government seems to be delaying its actions aimed at fighting the slowdown. But why a stimulus package for the middle class? The answer lies in the urgent need to revive the private consumption, that is to generate demand. The driving factor behind the slowdown remains a slowed consumption and lack of demand from the middle-class which forms an important chunk of the population consuming the most. A stimulus package to this sect of the population would mean kickstarting the revival process, and 85-90% of the population in this section is employed either in the government sector or in Public Sector Units (PSUs). It is evident that the government is functioning to the best of its capacity in these unprecedented times. Nevertheless, it is very important to clear state dues at the earliest in order to ensure revival in each and every part of the country. While the states and the Centre have been in a tussle over pending Goods and Sales Tax (GST) compensations, the Centre clearly stated that it cannot submit these pending compensations to the states owing to the medical and financial emergency and has, in fact, demanded the states to pay their GST dues for the year by borrowing, thus adding to the stress for the State governments who are already struggling to extract revenue. This is in complete contradiction to the ex-RBI Governor, Raghuram Rajan’s, statement who clearly stated in a recent article the dire need to replenish the state’s coffers as a crucial move towards recovery.

With enough food for thought and tremendous scope to plan out recovery models, there is another contradiction this article will close itself with. At the beginning of 2020, while presenting the budget, the Honourable Finance Minister, Nirmala Sitharaman had assumed a GDP growth of 10% for the fiscal year and moving closer to the target of a $5 trillion economy by 2024. On the contrary, the world’s fifth-largest economy in the pre-Covid era is believed to get 10% smaller as per economists across the world. The dire need to act real quick along with substantial stimulus packages is expected out of the government without any further delay, otherwise, the re-examination of the targets and goals stated in the budget for the financial year 2020-21 will be the last resort.


Vanshika Sighroha

A woman with opinions and confidence to voice them out freely, I am currently pursuing my majors in Economics. With a love for food, books and movies, I also love to write and further expand my horizon. I find my solace in travelling and good music!

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