The great contraction of India’s economy
The TLDR: Everyone knew the numbers would be bad thanks to the pandemic. But the GDP numbers released on Monday shocked even hardened pessimists. Our GDP contracted by 23.9% in the months of April, May and June. Every metric of economic activity has crashed with the exception of agriculture. And it bodes ill for our economic growth for the coming year—which is poised to be the worst since India gained Independence.
Remind me what GDP is?
Vivek Kaul offers the clearest explanation of what we mean by GDP:
“GDP, in the conventional sense of the term, is defined as the ‘measure of all the goods and services produced inside a country.’ Nevertheless, as John Lanchester writes in How to Speak Money: ‘GDP can be thought of as a measure not so much of size… It measures the movement of money through and around the economy; it measures activity.’... One man’s spending is after all another man’s income, and the income can be spent again. So, the cycle is supposed to work and add to the economic activity and the GDP.”
But our GDP numbers are not wholly accurate—and the damage may be worse. As the New York Times points out:
“India’s picture is further complicated by the fact that so many people here are ‘informally’ employed, working in jobs that are not covered by contracts and often fall beyond government reach, such as rickshaw driver, tailor, day laborer and farmhand. Economists say that official numbers are bound to underestimate that part of the economy and that the full damage could be even greater.”
Further muddying the numbers: The pandemic has made data collection highly challenging, as the government itself admits. So no one knows exactly how bad it really is.
How bad are we compared to everyone else?
Pretty bad. Only Peru (-30.2%) and Macau (-67.8%) have reported lower GDP growth numbers for the same period. Others doing poorly include the UK (-21.7%), Spain (-22%) and the US (-9.5%). Only two countries reported economic growth: China and Vietnam.
Ok, why are the numbers so bad?
The main activities that drive a nation’s GDP are as follows, and they’ve all crashed in the past quarter:
Private consumption: is what each of us spends on goods and services. This typically accounts for 56.4% of India’s GDP. This has shrunk by 27% or Rs 5.318 trillion (5,31,803 crore).
Private investment: is what businesses spend—be it on salaries, goods or services—and it’s the next big engine of growth. This usually accounts for 32%. And this slice has shrunk by an even greater percentage—by 47% or Rs 5.33 trillion (5,33,003 crore).
Let’s pause and absorb that fact: the two biggest drivers of economic growth—which account for 88% of all activity—have crashed.
Government spending: is the third driver and usually accounts for 11% of the GDP. But this indicator is up—by 16%. Looks good right? Not quite, as Indian Express explains. Government spending increased by just Rs 683.87 billion (68,387 crore). But the overall GDP lost Rs 10.6 trillion (10,64,803 crore) due to a crash in investment and consumer demand. In other words, the increase in government spending only covered 6% of the other losses.
Also this: Government spending now accounts for 18% of our GDP—up from 11%—but that is also misleading since it is 18% of a much smaller pie (since the size of the overall GDP has dramatically declined).
Last but least significant: is the number for net exports minus imports—our trade balance, basically. This is usually negative since we import more than we export—and doesn’t really drive our growth. This has dramatically increased by 165% because our imports have crashed—but for all the wrong reasons. Since businesses ceased activity and investments, they also stopped importing goods.
But the total lockdown ended months ago!
Yes, but the economy was already slowing down significantly long before the pandemic.
Take consumer demand, for example. Auto sales were crashing back in August 2019, as were real estate sales. Sales of consumer goods were at all-time lows this year.
Declining demand was caused by stagnating incomes—which in turn was driven by nose-diving levels of private investment. The biggest companies were simply not putting money into their business. All of which had created a perfectly vicious cycle:
“Indian economy’s biggest problem today is that hit by job losses and lower income growth, consumers are buying less and less goods. It’s not just big-ticket purchases like houses and cars that have taken a hit but sales of even daily consumption items like soaps and toothpaste have declined. Poor rural demand has affected the sale of two-wheelers, tractors and daily consumption items too. As poor demand forces these businesses to cut or halt production, it’s leading to pay cuts and job losses, leading to some sort of a vicious cycle for the economy.”
The pandemic simply tipped us over the edge.
So what can we do now?
Our economy was slowing down but still growing by about 7% before the pandemic. Most analysts agree that we will flip that entirely around during this fiscal year—and shrink anywhere between 5% and 9.5%.
But no one can force individuals or companies to get their wallets out when they’re feeling broke. Everyone agrees that the only way is for the government to spend its way out of trouble—even though it doesn’t have a lot of spare cash to do so. According to one leading analyst:
“The Indian economy has clearly landed in a severe vicious cycle with the need to stimulate demand becoming paramount while the capacity to support demand by the government is at its weakest. Without stimulating private consumption and investment demand, it may be difficult to arrest this downward momentum.”
Reading list
Indian Express offers the clearest explanation. Business Standard has the best charts. New York Times has the best takes from experts. Mint looks at the growing disconnect between the soaring markets and crashing economy. Case in point: the market is now up 200 points. If you care, The Telegraph explains the difference between nominal and real GDP—and why a contraction in the nominal GDP will be truly disastrous.