By Dr Partha Chatterjee, Dean – International Partnerships, Professor and Head of the Economics Department, Shiv Nadar University
“Given the strict nationwide lockdown the Government had imposed on 25th March 2020, it was expected that India’s economy will shrink in the FY2020-21Q1, but the quantum of decline at -23.9 percent is extraordinarily deep. This is lower than any of the G7 countries. A better context will be to look at other emerging economies in Asia. Malaysia’s GDP declined at 17.1%, Thailand dropped 12.2%, Indonesia contracted at 5.3%, while Vietnam actually grew 0.4% increase in the same quarter. This is even more worrying since the Indian economy grew at 5% or lower in the preceding four quarters. Recovery will not be easy or fast. As is well known, in emerging markets the trend itself can be lower for a period of time. India runs the danger to enter a low growth period for a prolonged time.
The decline is all around. Consumption (-26.6%) and exports (-19.8%) have fallen at a rate comparable to that of GDP, but the biggest fall has been in investments. Gross Fixed Capital Formation has fallen by a massive -47% and is now only 22.3% of GDP compared to 33% a year back, even with the sharp contraction of GDP itself. Imports have also fallen by -40%. All this is hardly moderated by a 16% increase in Government Expenditures.
The government needs to take urgent action. The first and foremost is managing the COVID-19 pandemic. It is clear that countries which have done well in managing the pandemic has also limited the damage to the economy. If the government is able to do that, it will bring back confidence among investors and households alike, giving a boost to consumption and investments.
The government has so far focussed mostly on liquidity measures. This has not prevented from large scale closure of firms, particularly MSMEs, and the corresponding job losses. The government has to think of innovative policies like paying employees of small firms, waiving off interest payments, etc. The government has done well in managing the fiscal deficit so far, but right now more important than fiscal deficit management is boosting the growth rate. There is a scope for the government expenditure to go up. This is an extraordinary situation, and extraordinary measures have to be taken”.