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Tough Road Ahead for India’s Sickening Economy

Data released by the Ministry of Statistics and Programme Implementation showed that India’s GDP growth rate has contracted by 23.9 per cent in the April-June quarter.
|| Shubh Mathur

The decline is a reflection of the deteriorating health of the economy that was already experiencing a deceleration even before the start of the current fiscal year- from 8.2 per cent in January-March 2018 to 3.1 in January-March 2020.

The triple whammy of a lockdown, decline in international trade and investments means that India is facing its worst economic crisis in the last 4 decades. While the IMF projects the growth rate contraction at -4.5 per cent, other economists have predicted the figure at a higher scale.

The reason behind the reeling economy is the contraction seen in all the major drivers of economic growth- Private Consumption, Investments, Government expenditure and exports.

According to the Centre for Monitoring Indian Economy (CMIE), 18.9 million salaried workers have lost their jobs since the lockdown, out of which 5 million were lost in July alone. This has poorly affected the demand side, crippling investment. According to CMIE, YoY growth in new investment projects was a meagre 1.85 per cent in 2019-20 which was 102 per cent 5 years back.

Government expenditure, especially in Infrastructure, was expected to offset the fall in private investments and revive the demand as well as job creation. In reality, state governments which were expected to spend 40 per cent of the National Infrastructure Pipeline project worth 111 lakh crore, have drastically reduced their spending in 2019-20.

“States have a two-thirds share in public investment, but they are not in a position to spend much in any area other than healthcare at present,” said Madan Sabnavis, chief economist with Care Ratings.

With countries raising transport barriers to prevent the spread of the virus, the impact on global trade was likely. Exports shrunk for the fifth straight month in July, declining by 10.21 per cent on the account of plunge in shipments of leather products, gems and jewellery, among others.

The informal sector and MSMEs are among the worst hit. With businesses shutting down driving an increase in bad loans and high inflation hurting the middle-class budgets, policy makers find themselves in a state of uneasiness.

Silver lining

Rural economy appears to be the only bright spot in an otherwise gloomy picture. Agriculture was the only sector to register positive growth of 3.4 per cent in the April-June quarter driving on a good rabi harvest this year.
“The rural economy, which supports 60-70 per cent of India’s population and accounts for 46 per cent of the GDP, is surging,” says Jayant Sinha, chairman of the standing committee on finance.

According to CMIE data, the rise in Agricultural activity, combined with increasing allocations to MGNREGA appears to have affected a drop in rural unemployment during this period. Another reason behind the uptick is the income support worth 40,000 crore to 100 million farmers through the PM Kisan Samman Nidhi by the government.

Can Agriculture suffice to offset larger economic loss?

Since Rural demand contributes only 15 per cent to India’s GDP, experts suggest that gains in agriculture are insufficient to offset losses in other sectors of the economy.
According to RBI, a fuller recovery in rural demand is held back by the migrant crisis and associated job losses. As rural households depend on sectors like construction and manufacturing, the revival in these will shape the growth in rural economy in the near future.

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