India’s economy is ailing but Covid-19 is not the only reason for its suffering

Even before the pandemic, the fundamentals of the Indian economy were already quite weak

The Central Statistics Office (CSO), the government’s official statisticians, confirmed on May 31 what was more or less already known, or had been predicted. India’s gross domestic product (GDP), in real terms, contracted 7.3 per cent during FY 202021, while the fourth quarter of the fiscal showed a meagre rise of 1.6 per cent. This is India’s worst performance in over four decades since 1979 and reflects the delicate state of the economy battered by Covid-19 and the national lockdown, which had lasted till June 2020. In 2019-20, India’s GDP growth was a poor four per cent, an 11-year low, mainly because of contraction in sectors like manufacturing and construction.

While some economists had predicted a slightly bigger contraction in full fiscal GDP growth and the CSO had also projected 8 per cent shrinkage in FY 21 GDP, the RBI had however, projected the GDP to shrink by 7.5 per cent. However, many economists and analysts had expected the economy to record a better performance in the March quarter. Therefore, the fourth quarter numbers are poorer than expected, given that all sectors of the economy had been opened up completely and the Covid situation was near normal for most of the March quarter. Yet, a 1.6 per cent growth in the fourth quarter shows that all is not well with the economy and fiscal health of the nation.

Of course, 2020-21 was an uncertain year not only for the Indian economy but also for the global economy. In 2019-20, Covid had just begun to spread across the world. India recorded its first Covid case on January 30, 2020. The infection graph started rising gradually and the world, as also the Indian economy, was staring at an uncertain future. As economic activity collapsed because of a national lockdown towards the end of March till end June, the economy was bound to shrink. Amid a strict lockdown, the April to June quarter saw a contraction of 24.4 per cent, while the second quarter witnessed a contraction of 8 per cent. However, in the third quarter, aided by festive demand, the economy rebounded to a positive growth of 0.4 percent.

As hope and optimism replaced the despair of the previous months by the turn of the New Year, consumer spending led to the recovery in the economy, thus putting an end to two successive quarters of contraction, to two successive quarters of modest positive growth. But India is once again in the midst of the second Covid wave, which is likely to impact GDP growth in the first quarter of the current fiscal. How and whether Indian economy will be able to stage a smart recovery from the second wave will depend on how quickly we are able to control the spread of the virus and the pace of vaccination. Currently, vaccination is progressing at a much slower rate, of about two million jabs a day. This means the recovery in the economy appears to be several months away.

There is no denying that Covid has been a huge shock to the economy, which has resulted in a crash in GDP growth and per capita income. But it is also true that the Indian economy was on a downward spiral much before Covid hit us. Contrary to the perception created by the government, economists and analysts are of the view that the slowing GDP growth rate has been a cause of worry for five of the past seven years of the Modi government. In fact, even before Covid was declared a pandemic, the fundamentals of the Indian economy were already quite weak.

After the decline in economic growth in the wake of the global financial crisis in 2008, Indian economy started its recovery in March 2013, more than a year before the Modi government came to power. According to RBI’s annual report for FY21 released on May 27, the recovery cycle lasted till September 2016 and after that, it turned into a secular decline in growth since the third quarter of 2016-17. While there is no official explanation for the deceleration in growth, many economists believe that the Modi government’s sudden decision to demonetise 86 per cent of India’s currency on November 8, 2016, was the trigger that set the economy on a downward spiral.

This was followed by the hurried implementation of a poorly designed GST. As the combined effect of demonetisation and GST spread through the economy that was burdened with massive bad loans in the banking system, the GDP growth rate steadily fell from 8 per cent in FY 2017 to 4 per cent in FY 2020, just before Covid hit us hard. The result: a drop in per capita GDP, rise in unemployment, increase in poverty and a diminution in the size of India’s middle class. India’s per capita GDP has dropped to Rs 99,700; this was the level in 2016-17.

On the unemployment front, India has performed even worse: against the norm of an unemployment rate of 2 to 3 per cent, the new norm in the unemployment rate was 6 to 7 per cent in the years leading up to Covid-19. The pandemic has made matters worse.

According to the latest CMIE data, the unemployment rate is 14.5 per cent as of the end of May and the rural unemployment rate has crossed 7 per cent. This comes at a time when the labour force participation rate, which maps the proportion of people who are looking for a job, is falling. As growth has slowed, poverty has increased: according to Azim Premji University’s ‘State of Working India’ report, 2020, almost 230 million people have fallen back into poverty, against 270 million lifted out of poverty between 2000 and 2016. That’s not all. According to a new Pew Research Centre Report published before the second Covid wave surge, the Indian middle class has shrunk by almost 32 million people in 2020.

What does all this mean? It means loss of jobs, salary cuts, loss of savings, low consumer spending, lower demand and loss of investment. This also means slower growth prospects, rising poverty and shrinking middle class. While the main indicators of a sound economy are quite weak, falling economic conditions will have adverse impact on livelihoods. Surprisingly, while we are in the midst of a pandemic and talking mainly about how soon we will come out of it, there is little anxiety and concern about the economy’s huge underperformance, not just because of Covid but also because of bad policies and mismanagement. So, don’t believe it if anyone tells you that the pandemic is the main reason behind India’s growth having gone off a cliff. The sequence of quarterly GDP growth numbers leading up to March 2020, when the pandemic hit India, tells a different story of a downhill journey, from 7 per cent in 2018-19 to 3.1 percent in the quarter that ended with the lockdown.

Contrary to the perception created by the government, economists and analysts are of the view that the slowing GDP growth rate has been a cause of worry for five of the past seven years of the Modi government

The author is an independent senior journalist