This data story has been written by Somnath Ingole, Economic Analyst Intern at Arthashastra Intelligence

The covid-19 pandemic has proven to be a disaster for claiming the lives of millions of people across the world. Moreover, it has shown a worrisome impact on the economic performance of countries caused by restrictions and lockdowns. From an Indian perspective, we have paid a huge price for it in both ways- loss of human lives and deteriorating condition of the economy. The repercussions of the second wave of covid-19 from March 2021 to May 2021 have been catastrophic. All this is reflected in the economic performance of the Indian economy as reported by National Statistical Organization (NSO).

On the 31st May 2021, National Statistical Organisation released the estimates on growth for the year 2020-21. It has come out that India’s Gross Domestic Product (GDP) contracted by 7.3% for the FY 2020-21, which is the most significant contraction in India’s GDP since independence. However, this contraction in growth rate by 7.3% seemed somewhat better than as anticipated contraction by the Reserve Bank of India and Ministry of Statistics and Programme Implementation (MoSPI), which stood at 8% for FY 2020-21.

India had two waves of Covid-19. The impact of the first wave resulted in a -23.9% contraction in GDP (Q1), followed by -7.5 % for Q2, then improving to 0.4 in Q3 and 1.6 % in Q4. The main contributors in the recovery of Q4 are the manufacturing and construction sector. They have reported 6.9% and 14.5% growth against their earlier quarter estimates which are 1.7% and 6.5%, respectively. On the GDP expenditure front, there is an increment in gross fixed capital formation to 10.9% in Q4, a proxy of private investment, which shows that investment is gaining momentum during the lockdowns. In addition to government, final consumption expenditure and other factors of private consumption expenditure grew by 28.3% and 2.7%, respectively.

From the above graph, we can see the quarterly progress of the growth rate. Steep contraction in the GDP growth for FY 2020 can be viewed from two different perspectives. First, one can say that this steep contraction is an outlier because if we see the record of India’s GDP growth over the last few years, then it shows that the Indian economy has not gone through this kind of substantial negative contraction before. Also economy has succeeded to maintain a positive growth rate in almost all years. Moreover, the negative contraction occurred because almost every country faced negative growth due to the pandemic except few countries like China. Another perspective on India’s GDP performance in FY 2020-21 can be stated as that contraction in FY 2020 is not an outlier, but GDP growth is slowly happening for the last three years. More precisely, after the Q3 of FY 2016-17, the growth rate has become more volatile, and the direction of growth rate shows a declining trend till the Q2 of 2020, as can be seen from the graph below.

We can see that after the global financial crisis, the growth rate was showing recovery till the Q3 of FY 2016-17 along-with and after that, it started to fall till the Q3 of 2020 contraction in GDP growth, which was one of the steepest contraction in GDP in nominal terms last 42 years.The primary reasons for the decline in the growth rate from Q3 2016 are structural reforms in India at that time. Demonetization of 86% Indian currency, implementation of Goods and Service tax in addition to this increment in the non-performing assets of banks pushed the growth rate to fall from 8.3% till 4% before Covid-19 pandemic.

If we look at the gross value added (GVA) or contribution of each sector of the economy in the total gross domestic product from the below graph. During the FY 20-21 faced severe contraction except for agriculture, forestry, quarrying, water supply, and other utilities. From the below graph, we can see the contribution of the selective sector to the overall GDP.

Looking at the growth scenario at the global level shows that repercussions of the Covid-19 pandemic gave a negative shock to the developed economies. However, they have also hardly hit by the lockdown and restrictions. The following graph based on the World Economic Outlook (April 2021) of the International Monetary Fund shows the world scenario before covid-19 and after covid-19. It can be seen that almost all developed countries have reported a negative growth rate for 2020-21 except for China, which has succeeded to report a positive growth rate of 2.3% for the annual year 2020. IMF forecasted a 12.5% growth rate for India in 2021 with a contraction of -8% in 2020, which seems pretty impressive. However, considering the impact of the second wave, the IMF can revise this estimation in the coming days. Most of the agencies have revised their growth rate estimates than earlier estimates regarding the Indian economy, considering the impact created by the second wave. World Bank estimates it as 8.3%, JP Morgan to 11%, Moody’s forecast is 9.3%, and RBI estimates it to 9.5%.

After going through a deep contraction, the Indian economy has reported a positive growth of 1.6% in the Q4 of 2021. However, to keep the momentum of reporting incremental positive growth rate will depend on removing localised lockdowns in the different states and curbing covid-19 spread through preventive measures. In the last 2-3 weeks, active cases are falling, and many states like Maharashtra, Delhi, and others have started to ease the lockdowns gives hope that the economy will get back to an improved state in the coming quarter. However, to revive demand in the economy and boost economic activity, rapid growth in vaccination will be a crucial driver. In addition to this experience of major advanced economies, as they have progressed in vaccinating the population, economic activities got boosted, and private consumption has also increased. Therefore, as rightly mentioned by Arvind Subramanian, India needs a strong vaccine policy. In light of this recently announced central government’s vaccination policy is a crucial step to save thousands of people and prevent the third wave.

References

• International Monetary Fund, “World Economic Outlook”, April, 2021
• Udit Mishra, “India’s GDP fall, in perspective”, The Indian Express, 7^th June, 2021
• Arvind Subramanian, “How to distribute vaccines”, The Indian Express, 7^th June, 2021
• Data on various indicators from RBI database for monitoring Indian economy and National Statistical Office