What Can We Expect Out Of India’s Economy?

The recently published figure of India’s Gross Domestic Product (GDP) shows that it increased by 20.1% in the first quarter of year 2021-22. While the percentage figure looks splendid, it was because of the base-effect. The percentage rise in the GDP was as compared to the GDP of First quarter of year 2020-21. This was the time when India implemented a stringent lockdown because of the covid outbreak, which resulted in a massive 23.9% of contraction in India’s GDP. So the real way of looking at this number is that India’s GDP during this period is lower that what it was in April-June 2018. As I pointed out last year, even if the growth rate would have been 30%, GDP would have remained what it was in April-June 2019. So in that context, we have pushed back several years, which is not a thing to celebrate about, I guess.

The formula of GDP is,

GDP = C + G + I + X

Here, C stands for private consumption (the money you and me spend in a year) which forms the largest part of Indian GDP. G stands for government spending. I stands for investment, which means money spent on fixed assets like machinery, inventory, roads, railways, plants etc. And X stands for net exports (Exports – Imports). Now, investment in this formula plays one of the most important role in an economy. As Ruchir Sharma writes in The Ten Rules of Successful Nations,

“…[W]hat the book often won’t tell you is why I reveals the most about where the economy is heading. Without investment, there would be no money for the government and consumers to spend… Investment help create new businesses and jobs that put money in consumers’ pockets… I is by far the most important indicator of change, because booms and busts in investment typically drive recessions and recoveries.”

In India’s context, Investment as a percentage of GDP has been declining for a decade now.

Source- LiveMint

Also, india was facing an economic slowdown even before the pandemic started, pandemic has just made the matters worse. Apart from investment, private consumption has also seen a downward trend. Private consumption as a part of the GDP in the first quarter (55.78%) was the same as private consumption in 2006 (55.15%).

India has a demand side problem with sectors like automobile, which is stagnated in the past few years. Also, the Index of Consumer Sentiments doesn’t show great news either. According to a report by Centre for Monitoring Indian Economy,

“The index of consumer sentiments (ICS) improved 10.7 per cent in July 2021 over its level in June 2021. However, at 53.01 (base 100 in September-December 2015) it was still just half of its level before the Covid-19 induced lockdowns began in March 2020.”

So, all in all there’s a vicious cycle which has started. People have lost jobs or seen their salary decline during the pandemic. This has caused resistance amoung them to spend their money, which in turn has not been beneficial for the businesses and they have started to cut down on their expenses by either firing employees or cutting their salaries. Normally, in such a situation, government becomes the spender of the last resort and tries to create employment by spending, which increases the income of people, who then go out and spend that money, and creates a positive cycle. But, this will not be the case with India, as the Indian government’s fiscal deficit reached 9.3% of the GDP as shown in the CGA report earlier this year. Most of the government schemes, from collateral free loans to PLI schemes have aimed to help the supply side (i.e. the businesses) while India is facing a demand-side problem. Increasing oil prices and a high inflation has not helped either. Low interest rates on fixed deposits, which forms around 80% of india’s savings, has forced the savers to save more, decreasing the demand even more in that process.

The good part is that GST revenues and exports have seen an increase this year which is good for Indian economy, but surely a lot needs to be done. We can start by putting some money into the hands of people, be it anyway; by cutting taxes or by direct cash transfers. An urban employment guarantee scheme (just like MNREGA in rural India) can help boost the demand as well. But, this requires sincere efforts from government’s side.

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