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Q1 GDP Figures - Impact and Way Forward (5 September 2020)

Q1 GDP Figures - Impact and Way Forward (5 September 2020)

Why in News:

The GDP contraction in the world's fifth-largest economy compared with 3.1 per cent growth in the preceding January-March quarter and 5.2 per cent expansion in the same period a year back, according to official data released on Monday.

Context:

India's economy suffered its worst slump on record in April-June, with the gross domestic product contracting by 23.9 per cent as the coronavirus-related lockdowns weighed on the already-declining consumer demand and investment. This is the sharpest contraction since quarterly figures started being published in 1996. The pandemic has caused historic GDP contractions in economies around the world.

Background:

The June quarter GDP data is the worst contraction in the history of the Indian economy since Independence. According to the economists surveyed by Bloomberg, India’s GDP is estimated to have declined 18 per cent in the quarter ended June.

Summary of the Debate

Major factors of GDP Contraction:

  • The problem arose because two key areas are showing a huge drop-construction and services. Construction is a short drop of about 50 percent and services is about 47 percent. These are the one which causes lot of problem because that is where employment and demand is generated.
  • One of the reasons for this slowdown is the harsh lockdown, India’s contraction in first quarter has been the highest in the world by far.
  • The government has so far focused on supply side only.
  • The fall in private final consumption is the major challenge for the economy because it has a weight of almost 60% in the GDP.
  • The investment outlook has been bleakfor the last three quarters, and the pandemic induced crisis has only worsened the situation.

Impact on Industries:

  • Investment by private sector businesses have fallen by 47%.
  • Because of the shutdown initially, there was a complete demand shock and the supply shock and the urban area was very badly affected. There were large number of businesses in urban areas which are all basically a daily livelihood whether a cab driver or vegetable sellers, etc were shut down.
  • Similarly, factories like metals, chemicals, textiles had to be shut.
  • Particularly, harshly hit was retail sector. The retail sector is 60 lakh crores out of the economy and that consist of both traditional retail and modern retail. Modern retails are shops and malls and they depend on footfalls.

               

Way Forward:

  • Government spending, reforms, and more measures to boost consumption is required to bring back growth on track.
  • The demand must be revived.
  • MSMEs Minister has said that the government of India owes 5 lakh crores to the vendors. These are bills, invoices not in dispute. So, those payment has to be immediately cleared.
  • All pending payment must be cleared.
  • All pending income tax refund must be done instantly.
  • There are unutilised GST credits and those have to be returned. If the government does not have the cash then allow corporates to use the GST credits to make future GST payments.
  • The GoI should start doubling down on the healthcare because the demand in the economy can be increased by building healthcare centres, by building more hospitals, by having more Doctors.
  • There should be focus on education and skill development and these have to be scaled up so skilled workforce can move up in the value chain.
  • The government focus should be on urban demand growth, the problem is not rural demand. Doing the public spending alone is going to have big problems because of what has been happening.

Important points made by the Guests

Nitin Desai, Former Chief Economic Advisor

  • The agriculture has shown a positive sign because Rabi was good and it will show even better in kharif, the number suggest 20 percent increase.
  • The lot of people who went back in village during lockdown started cultivating on their little land they had. The beginning of the upswing will have to come from rural demand. But for that the government must be prepared because the lot of agriculture output is coming out and there is very little demand growth in urban area. So, the government have to make sure that the farmers are not stressed.
  • It will involve many things for instance, opening of the export and preparing for it from now. The government should start working from now itself that how they are going to handle a bumper kharif harvest when it starts coming out in October- November and what they are going to do in order to stimulate export because this is the best short-term option.
  • We really don’t have the room for public sector spending because of what has happening to the tax revenue, drop in GST and so on. Unlike, 2008 where we had room for taking fiscal risk, this time we do not have as much room for taking fiscal risk.
  • The Centre is not paying what they required to pay under the agreement which former finance minister Arun Jaitley has finalized that is 14 percent increase in state level GSTcollection. So, the demand growth has to take place at state level.
  • Basically, the lockdown was probably harsher than it should have been. It should have left some of the more employment intensive sector alone.
  • Government focus should be on stimulating demand growth, initially from in urban employment, they should also stimulate the industries because industries have money and if they start seeing demand growth then investment will also start coming in.

 Ajit Ranade, Chief Economist, Aditya Birla Group  

  • The GDP can be look from two angle;
    • Production side: Agriculture, Industry and Services
    • Spending side: Consumer’s consumption spending, Investment spending (which is expansion of factories new capacity), government spending, net export (which is spending by foreigners)
  • The government spending went up during this quarter. The large fall in consumption spending was about 26-28 percent, Investment spending was down by almost 50 percent, Export went down by 20 percent and imports went down by 40 percent.
  • In this quarter, the current account went surplus for the first time after many years. But the current account went surplus because imports went down much more.
  • The slowing down of GDP is a trend which we have seen for almost 3 years as of now. So, the GDP slowdown, the stagnation of Investment to GDP ratio, the weak export performance of the country and the NPAs ratio from the banking which is steadily rising. Even prior to the covid pandemic and the harsh lockdown the performance in these areas were sliding.
  • 1 percent growth rate less in GDP annually is 2 lakh crores of income permanently gone. So, to that extent the fact that the GDP growth is lower that’s the permanent loss of income.

Abhinav Prakash, Assistant Professor, University of Delhi (DU)

  • The main problem in India from spending side is of income problem. In India lots of jobs available but the problem is that the government has been unable to provide good, well paying and stable jobs for the youth and that is the structural problems which have going on for years and years.
  • There has been massive job loss, the major collapse in GDP is coming from the industry and especially the manufacturing which is -39 percentand the construction which is -50 percent and most of the labour forces are employed in these sectors.
  • There has been massive decline in the purchasing power of the people and that is going to have very strong impact as we go forward because so far, the government response has been on the supply side for instance, doing the reform in agriculture and in the mining sector, which are must needed. But the government must need to boost income of the people so that consumption goes up and that can only be supported by creating well-paying jobs.
  • One thing Centre and state government can do is to start filling up all the vacancies in the government sector.
  • Historically, in India demand has come from two places one is the public sector employees because they have more stable and relatively well-paying jobs and it has come from the businesses who are taking credit and doing investment. Both of them are down at this moment.

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