Editorial Analysis for 2nd September 2020

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Inevitable collapse: on steepest contraction of GDP


Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management


  • The inevitable has happened.
  • India’s GDP suffered its steepest contraction on record in the April-June quarter, as output shrank 23.9% from a year earlier, provisional data show.


  • The stringent COVID-19 lockdowns in force during the period of the first quarter seem to have hollowed out demand. Private consumption spending, which accounts for almost 60% of GDP, has contracted 26.7% as consumers have limited themselves only to essential spending and stopped almost all discretionary spending.
  • The services categoryincluding trade, hotels and transport have been severely hit by the pandemic-linked restrictions.
  • The manufacturing sector has registered a contraction as demand for products deemed non-essential declined, and factories, even after reopening, struggled to run amid shortages of labour and added safety norms.
  • Exports, which contribute to almost 20% of GDP, have registered a massive decline due to lockdowns, restrictions in the movement of goods, cancellation of orders from importing countries.
  • Investment activity has witnessed a steep contraction of about 47% as large businesses have decided to conserve cash and have refrained from any capital spending in the face of uncertainty, and smaller firms have prioritised survival.

Concerns and Challenges:

  • There are concerns that the economic contraction may not be just a transient phenomenon and there is the possibility of an extended slowdown.
  • The Centre’s pandemic mitigation expenditure helped expand its consumption spending by 16.4% year-on-year and thus helped soften the overall blow to GDP.
  • There is very limited scope for such an expenditure growth over the next three quarters because of the following reasons:
  • The fiscal deficit in just the first four months of the financial year has already exceeded the full year’s budgeted target and the central government has expressed its desire to respect the fiscal limits set by the FRBM Act.
  • Revenue receipts for the government have decreased due to the economic contraction.
  • The NSO data are provisional figures and are expected to undergo revision as they do not capture the informal sector due to difficulties in collecting data.
  • The informal sector accounts for a major share of the Indian economy and there is wide acceptance of the fact that the lockdown has had a higher detrimental effect on the informal sector. This would imply that the current estimates are not indicative of the actual output decrease and the revised estimate might only provide a further drop in the growth numbers.
  • There have been reports of ahigh level of job losses and income erosion.
  • The latest survey-based data from IHS Markit though expects manufacturing PMI for August to register growth, also notes that job shedding would continue at a strong rate in the industry.
  • This would have a detrimental impact on the disposable income in the hands of the people and also lead to decreased consumption expenditure.
  • The still-rising trajectory of new COVID-19 infections would retard any recovery in growth.


  • Despite a good performance in the agricultural sector, which grew 3.4%, outpacing 2019’s first quarter’s 3% expansion, it too faces headwinds in the form of higher-than-ideal rainfall in August in several key crop-growing regions in western and central India and the uncertainty with respect to the impact of recent farm market ordinances.

Way Ahead:

  • With COVID-19 hitting private consumption, demand recovery will hinge on government spending and the government must give up its fiscal conservatism and find innovative ways to mobilise resources.

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