Scale of shrinkage in GDP worrying

The decline in economic activity, reflected in the fall in GDP during the first quarter of the current financial year, has turned out to be much worse than expected. A 23.9% contraction of the economy sets a poor record and shows that the nationwide lockdown which was in place in April and May has taken the economy back to the 2014 level, erasing the gains made since then. The actual damage could be much more, because the available figures are provisional as all data could not be collected during the lockdown days. The informal economy, which forms a major part of the economy and affects the lives of large numbers of people, has taken a most serious blow. There are no reliable estimates of its performance and when that too is added, the overall picture is likely to become bleak and dismal.

All sectors of the economy, except agriculture and allied activities, had a free fall. Private consumption spending, which supports much of the GDP growth, fell by 26.7% as all non-essential and discretionary spending was avoided by consumers. Investment activity and exports, which contribute to a major part of the economy, fell by 47% and 20% respectively. Among all the sectors, construction was hit the most, shrinking by as much as 50%. Services, which cover trade, hospitality and transport, were down by 47%, followed by manufacturing’s 39% contraction. Sectors which saw less damage were financial services and power as they saw only single digit declines. Public administration, defence and other services also declined by more than 10%. The only green patch was the agriculture sector, which grew by 3.4% with a good rabi harvest. There is the prospect of a good kharif harvest, too, which augurs well for the sector, though there are worries about the impact of uneven rainfall in some key farming regions.

But the prospects for the other sectors, and thus for the economy, are not promising even with relaxation in the lockdown and the reopening of many areas. There is some pick up in some sectors. But the pandemic is spreading, and so economic activities will continue to be constrained and businesses, households and individuals will be averse to spending. The only remedial measure that can help seems to be increased government spending, which can boost demand and send growth impulses across the economy. The fiscal deficit target for the whole year has been exceeded in just the first four months and government revenues are shrinking. But the government will have to find ways and means to increase expenditure, as that seems to be the only way out of the present economic circumstances.