Cramp in GDP signals failure

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So, cat is out of bag. And it’s shocking. There is an absolute economic fiasco which has engulfed the country. India’s April-June quarter Gross Domestic Product (GDP)has contracted by a massive 23.9 per cent year-on-year (YoY), the first GDP contraction in more than 40 years. Experts have called it biggest economic crash. Notably, GDP estimates in 2020 had already painted a very bleak picture. The World Bank had projected 3.2 per cent contraction, while the International Monetary Fund pegged it at 4.5 per cent and the Asian Development Bank at 4 per cent. Nomura had estimated growth at (-)5.2 per cent, and Icra had recently revised its forecast for contraction in the current fiscal to 9.5 per cent.

Most significantly, On May 22, the Reserve Bank of India (RBI) governor Shaktikanta Das had said the Covid-19 pandemic will likely lead to a contraction in India’s gross domestic product (GDP) in the financial year 2020-21. In the words of an economic expert, ‘the RBI won’t lose too much sleep on this number as it was expected. The RBI still has its focus on growth. This (GDP number) slightly improves chances of a rate cut in October. Unless the inflation comes below 5% in the next reading, the RBI still might postpone the rate cut to December.’

Historically speaking, India has seen four instances of contraction in GDP taking place in the years 1957-58, 1965-66, 1972-73 and 1979-80. Experts have pointed out that in three out of these four years, the reduction in agricultural GDP was greater than the overall reduction in GDP, meaning the non-farm economy did not contract.

Now the current contraction is seen as more deadly as many experts forecast the reverse to happen this time. “It is the non-farm sector which will see a contraction, while agriculture is likely to grow. The share of the non-farm sector in both output and employment is significantly greater today than what it was when India faced the earlier GDP contractions,” they said.

Here, it’s worth mentioning that the higher growth rate of GDP is important not only for the economic health of a country but also for the common man, be it directly or indirectly.

Apparently, the current economic fiascoes are attributed to the outbreak of Covid-19 pandemic and subsequent lockdown. However, the fact remains that Indian economy was slipping into shambles much before the onset of the pandemic. Experts were voicing their serious concern over the slowing down of economic growth even as Prime Minister NarendraModi-led BJP government had set itself an ambitious target of achieving a $5 trillion economy by 2024-25. Remarkably, in pre-covid scenario, a former World Bank chief economist while analyzing the consistent loss of steam in the Indian economy had stated that the $5 trillion target was achievable only by 2032-33.

Now the pandemic outbreak in March 2020 has of course added more woes to the economy, but it has exposed the gross weaknesses in the economic sectors which were there much before the pandemic crisis. The government was always in denial mode whenever experts tried to list loopholes in the economic sectors slumping growth.

Now, when cat is out of bag and we are officially heading towards depression, it’s the time for general masses to act sanely while handling their available financial resources. They have to understand that contraction in GDP growth leads to recession and if such contraction continues for another two-three quarters, depression in economy is inevitable. It has a direct bearing on the earning potential of people and decreases wages among others.

While deliberating upon the unprecedented contraction in the GDP and its impact on households, I am reminded of a very interesting incident here which makes to sense to share it with readers. Daewoo Motors, which was a South Korean automotive company established in 1983, part of the Daewoo Group and went bankrupt after running into financial difficulties, launched a luxury car brand namedCielo in India in 1994. The car (Cielo) became the choice of every man who could afford it at that time. Precisely, Cielo was all about perfect luxury and was everybody’s dream car that time.

One of my close acquaintances running a small medical shop in a rural area showed excitement about the Cielo and used to talk about it a lot whenever he used to get opportunity to spend some leisure time with his friend circle. He had that time recently purchased a very old model second-hand white-coloured Bajaj Super scooter in a few thousand rupees. He was all praise for his scooter and would lose no opportunity to talk about its high power performance.

Once, while discussing car models of high brand value in his group, he revealed an astonishing plan. “I have decided to now own a car, that too Cielo brand,” he said. His friends exclaimed with joy and started dreaming of having ride in the car soon. However, they were within no time left dumb when he told them he would sell the scooter to buy Cielo car! Selling a product (very old model scooter) which would not fetch more than few thousand rupees to buy a luxury car like Cielo costing over Rs. 8 lakhs was simply display of a bad economics. Sometimes, I still wonder how he could make such a plan where there was huge gap between what he had in hand and what he was aspiring for.

The main point in the above story is that one should not aspire for luxurious comforts when one’s financial position is not matching the desires. Though bank loans are easily available to lay hand on any luxury, the kind of economic scenario around us makes it risky and crisis like ongoing Covid pandemic can derail any strong financial position to struggle with repayment of loan.

If we look at the economic cycle in the Covid crisis, we can easily spot consumer expenditures affected in several ways. Disposable income stands considerably reduced as people have rampantlylost jobs and faced pay cuts. Even return on their investments too has gone down. Then there is another class of people who have not been directly affected on financial front. This segment too curtailed expenditure and make it a point to save in these times of crisis. Overall, total consumption expenditures have (and are) drastically undergoing change in the given pandemic- induced economic crisis.

With this change in expenditure pattern, people focus more on essentials and avoid expenditure on less or no-essential things. Those sectors of economy which deal in less or non-essential things are facing heat owing to disproportionate cut in consumer expenditure and they are witnessing slump in business.

Notably, people will lose capacity to save and there will be a dip into savings. There will be further massive job losses andtotal disruption of businesses. Household will be forced to lay hand on their past savings to stay afloat in the world’s most dangerous crisis which has challenged us on health as well as economic front.

If reports are to be believed, household savings rate has gone down in the last decade in India. According to a data available from dependable sources, from 23.6% in 2011-12, it came down to 18.2% in 2018-19. This substantiates the fact that households were dipping into their savings long before the onset of the current crisis.

In succinct, taking the current pandemic-induced crisis into account, the current contraction is going to affect a much larger part of the economy, especially in terms of more job losses and reduced income.The contraction is only going to worsen the situation.

(The views are of the author and not the institution he works for)