The Ministry of Statistics and Programme Implementation has recently published the growth numbers of second quarter of FY 20-21. The first quarter witnessed a record fall in GDP growth rate to -23.9% mainly because of the nationwide lockdown due to the COVID-19 induced pandemic. The second quarter starting from July, 2020 witnessed relaxation of lockdown with the economy gradually opening up. Moreover, the Government and the Reserve Bank of India also announced host of economic packages to enable the recovery.
Given this backdrop it was expected that the second quarter growth numbers will show some sign of recovery. The second quarter GDP growth rate stood at -7.5% as against 4.4% growth in the same quarter, FY 19-20. So India went to technical recession due to negative growths in two consecutive quarters.
Let us dig deeper into the components of GDP to examine how has been the progress across different aspects. Private Consumption and Gross Capital Formation ( Investment) account to over 80% of India’s GDP. Government expenditure contributes to another 10-15% of the GDP. So together these three components drive India’s GDP.
All the three components have the Q2, 2020-21 levels similar to 2017-18 , same quarter. So it can be said that as per all the three major components, Indian economy has leaped back three years during this period of recession.
Private consumption which is a reflection of demand in the economy was witnessing a slow down in growth since last couple of years. The level of growth achieved in 2018-19 was lower than that achieved in 2019-20. Now it has seen a decline in 2020-21 and is just a bit higher than the 2017-18 levels. Indian economy was already witnessing a slow down in demand even before the pandemic and has been a huge concern. With the pandemic kicking in, the demand has witnessed a decline. This is a result of multiple factors. One of the factors can be that people have been holding on to their expenses because of the uncertainty in the economy. One extension to this can be people are forced to hold on to their consumption. One of the most important factors is also the fact that many people have lost their income during this lockdown and also witnessed reduction in income which has a direct impact on consumption.
Slowdown or lack of demand leads to slowdown or negative growth in investment as with lower demand in the economy, there will be lower investments. This has been reflected in the investment numbers and there is a steady decline since 2018-19. So the decline in investment numbers started before the pandemic itself and hence recovery will not only mean to go back to the pre pandemic level but also will mean to witness growth with respect to the 2018-19 numbers. There has been host of measures taken by the government and the central bank, both in pre pandemic time (reduction in corporate tax) and post pandemic time ( measures in terms of providing liquidity and credit) to boost up investment. Pre pandemic measures did not bring the desired boost up. The post pandemic measures needs to evaluated further in the coming quarters. One reason for pre pandemic measures not been so effective has been the lack of demand in the economy, which was not addressed much. One will invest more if and only if there is demand in the economy. So demand measures might be more effective in boosting investment.
Keynesian economics calls for increased government expenditure when the economy is going through slowdown or is in recession. This is regarded as a means to bring back the economy to the recovery path. The Q2 numbers suggest that our government expenditure numbers have fallen significantly and at present it stands at the level of q2, 2017-18, which was a normal year and so was the next years. So a need to government expenditure is perhaps the most obvious prescription. However, it also needs to be understood that there are fiscal pressure and increase in government expenditure can lead to higher fiscal deficit which might be against the international norms. Moreover with slowdown in demand, government tax collection also goes below the target level and hence reduces the pool which can be spent. But many economists argue that during difficult times the focus should be recovery of the economy only and for that if the fiscal deficit increases, it should not be a issue.
So a detail study of different components of GDP suggest that economy can lead to a path of recovery if there is a boost up in demand which will have an indirect impact on investments. In order to boost up demand more cash in the hands of people is a viable solution and that will mean increase in government expenditure.