Brain Booster for UPSC & State PCS Examination (Topic: India GDP Data 2020)

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Topic: India GDP Data 2020

India GDP Data 2020

Why in News?

  • The Indian economy saw its worst contraction in decades, with Gross Domestic Product (GDP) shrinking by a record 23.9% in the April to June quarter in comparison to the same period last year, according to data released by the National Statistical Office.

Cause Behind Contraction

  • The contraction reflects the severe impact of the COVID-19 lockdown, which halted most economic activities, as well as the slowdown trend of the economy even pre-COVID-19.
  • Economists expect this to contribute to a contraction in annual GDP this year, which may be the worst in the history of independent India.
  • What is worse is that, because of the widespread lockdowns, the data quality is suboptimal and most observers expect this number to worsen when it is revised in due course.

Economics of GDP Contraction

  • In any economy, the total demand for goods and services — that is the GDP — is generated from one of the four engines of growth.
  • The biggest engine is consumption (C) demand from private individuals. In Indian economy, this accounted for 56.4% of all GDP before this quarter. It has fallen by 27%. In money terms, the fall is of Rs 5,31,803 crore over the same quarter last year.
  • The second biggest engine is the demand generated by private sector businesses. Let’s call it I, and this accounted for 32% of all GDP in India. It has fallen even harder — it is half of what it was last year same quarter. In money terms, the contraction is Rs 5,33,003 crore. So, the two biggest engines, which accounted for over 88% of Indian total GDP, Q1 saw a massive contraction.
  • The third engine is the demand for goods and services generated by the government (G). It accounted for 11% of India’s GDP. Government’s expenditure went up by 16% but this was nowhere near enough to compensate for the loss of demand (power) in other sectors (engines) of the economy.
  • The last engine is the net demand on GDP after we subtract imports (N) from India’s exports (X). In India’s case, it is the smallest engine and, since India typically imports more than it exports, its effect is negative on the GDP.
  • So total GDP = C + I + G + NX

Covid Hit Economy

  • The total value of goods and services produced in India in April, May and June this year is 24% less than the total value of goods and services produced in India in the same three months last year.
  • In terms of the gross value added (a proxy for production and incomes) by different sectors of the economy, data show that barring agriculture, where GVA grew by 3.4%, all other sectors of the economy saw their incomes fall.
  • The worst affected were construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%). It is important to note that these are the sectors that create the maximum new jobs in the country.
  • The Ministry of Commerce and Industry also released data on the eight core infrastructure sectors, showing that output contracted for a fifth straight month in July, with the 9.6% decline driven by a fall in production in the steel, cement and refinery products industries.

Deeper Concerns

  • The major burden on the economy is the contraction you are seeing in private final consumption, which has a weight of almost 60% in the GDP. If 60% of demand is growing negatively, the task is formidable, because unless this is turned around, nothing will happen.
  • The investment outlook is very bleak and may fall further. Consumption indicators are improving sequentially, but continue not on a year on year basis.
  • Only government expenditure can rescue the economy, but its own finances are too stretched.