A shrinking GDP could curtail govt’s ability to help the poor

On May 22, RBI governor Shaktikanta Das said the Covid-19 pandemic will likely lead to a contraction in India’s gross domestic product (GDP) in financial year 2020-21.

What does a contraction in

GDP entail for an economy? Statistically speaking, it means the 2020-21 GDP will be less than what it was in 2019-20. However, its real-life implications depend on sector-wise and distributive impact of the contraction. This will be the most widespread contraction India has ever seen. The previous four instances of contraction in GDP since 1951-52 were primarily a result of disruption in the agriculture sector. Most private forecasters expect the reverse to happen this time. With agriculture’s share in the economy down from the 1980s, contraction is likely to affect a much larger part of the economy this time.

Secondly, the fact that there was no contraction earlier does not mean that incomes were growing in India. Even when GDP growth was positive, there was a significant section reporting a decline in incomes in the RBI’S Consumer Confidence Survey (CCS). This share increased during the recent economic slowdown and will increase at a faster rate now. A contraction is also bound to lead to massive job losses, which will necessitate the use of past savings. Fourth, India’s direct tax collections depend on incomes of the richest. A big fall in their incomes will curtail the ability of the government to help the poor.