September , 2020
Falling GDP numbers signify widespread distress
18:58 pm

Rajiv Khosla

The first quarter (April to June) GDP of financial year 2020-21 witnessed a contraction of 23.9% which is the worst among the world’s top economies. In nominal terms, contraction from Rs 35.35 lakh crore in 2019-20 to `26.90 lakh crore in 2020-21 (for April to June quarters), indicates the onset of a deep recession after almost 40 years. So far, India has seen recession in five instances in the post-independence era i.e. in the years 1957-58 (-1.2%), 1965-66 (-2.6%), 1966-67 (-0.1%), 1972-73 (-0.6%), and 1979-80 (-5.2%). Economists lament that official numbers can contract even more when these estimates will be revised later - accounting for the losses in the informal sector.

A sharp de-growth is also recorded in three sub-sectors i.e. construction (50.3%), trade, hotels, transport, communication and services related to broadcasting (47%) and manufacturing (39.3%). These three sub-sectors account for nearly 45% of India’s GDP. India is not officially into recession right now as it takes contraction in two straight quarters to make it so. Yet, poor performance of the critical sub-sectors amid weak investment, meager capital spending and poor consumption demand in the economy is expected to severely impinge upon the economic fundamentals.

Increase in distress among states

 The corona pandemic has put a massive dent in revenues of the states. Loss in state VAT, excise, stamps and registration (due to continuous lockdowns) dues has created colossal disruptions in state finances. Further, the loss is not evenly spread among all Indian states as few states are bearing the brunt more than others. State Bank of India’s research report Ecowrap (issued on August 17, 2020) estimated that the top 10 Indian states may account for nearly 74% of the total GDP losses. Further, Maharashtra (14.2%), Tamil Nadu (9.2%) and Uttar Pradesh (8.2%) are the leading states sharing almost a third of the total losses of the fallen GDP.  Other states that are going to be substantially affected by the fall in GDP include Gujarat (8.1%), Karnataka, Andhra Pradesh, Telangana (6.7% each), West Bengal (4.9%), Rajasthan (4.8%) and Delhi (4.4%). On an average, a16% loss as percentage of GSDP is faced by every Indian state.

In India, the states are uniquely positioned to coordinate with both the central government as well as the local administration. Therefore, adequate equipping of the states with respect to finances becomes imperative. A sluggish attitude of the central government in paying GST dues can create major glitches. The State Bank of India’s research report Ecowrap also projected that the per capita loss for all Indians is around Rs 27,000 with states like Tamil Nadu, Gujarat, Telangana, Delhi, Haryana, Goa, etc. showing evidence of a loss of more than Rs40,000 per person in this financial year.

Increase in distress in the rural sector

Green shoots in the agricultural sector with a positive 3.4% growth rate have offered some respite to contain the GDP at minus 23.9%. Latest CMIE data shows that unemployment in the agricultural sector that decreased from 22.89% in April 2020 to 6.51% in July 2020 again rose to 7.65% in August 2020. It connotes that the momentary employment generation that took place due to the availability of cheap labour in rural areas for sowing kharif crops or under MGNREGA has started disappearing. If we go a step ahead, increased kharif production that will come up for sale around November this year, will eventually create a glut, thereby leading to a fall in prices and further worsen the economic health of the rural households. The rural sector is thus confronting problems on three accounts i.e. rising unemployment; fall in remittances earned from the working population in urban areas and rising Covid infections. Squeezed consumer spending in due course of time will cast its black spell on the corporate sector as well - who are mostly funded by financial institutions.

Increase in distress in the banking sector

The banking sector in India is already facing the problem of huge non-performing assets (NPAs). RBI’s Financial Stability Report for July 2020 categorically stated that gross non-performing assets of the banks may rise to 14.7% by March 2021 from 8.5% in March 2020. It is apprehended that an increase in NPAs will not only be on account of non-repayment of loans by the corporate sector. Rather, settlement of loans raised by the retail investors (due to massive unemployment and lower chances of alternative sources of income) will equally add fuel to fire.  In all possibilities, the banks will cut down the rate of interest on the deposits (as the government may not bail out the banks), thereby aggravating the grim demand scenario. On the whole, falling GDP numbers speak volumes about the depressing state of affairs.

In order to set things right, the government needs to come up with a hybrid action plan considering monetisation of debt, printing of new currency, issuing of government bonds to mop up additional investment in the stock market, direct transfer of money into the hands of people, and the creation of infrastructure.


The author is Associate Professor in DAV Institute of Management, Chandigarh

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