The country’s GDP had dwindled by 24.38 percent in the first quarter of 2020-21. It had bet on a household-consumption economic revival that may now take much longer to show results.
- India’s GDP shrunk by 7.3 percent over the past year according to May 31 provisional estimates released by the National Statistical Office (NSO).
- This is the first time that the country’s GDP is in the red since independence but even back then it had only dropped by 5.2 percent.
- India’s 2020-21 GDP has taken the biggest hit in the country’s history.
- Until the present times, the events of 1979 were considered to be the worst in the Indian economy when the GDP had shrunk by 5.2 percent.
The Gross Domestic Product (GDP) of India has tumbled down by 7.3 percent in 2020-21 for India. That is the most gigantic fall the country has ever witnessed since its independence in 1947. It is no surprise though that the country’s growth has been dwindling down for about half a decade now. This unexpected global pandemic only amplified the economic stress with numerous lockdowns and travel restrictions, yanking the economy into the red — something that had not occurred since 1979. In truth, the country has only recorded negative GDP five times in its history. Notably, most of these slumps were driven by floods, rising fuel prices, or droughts that thrust the country’s mainly agricultural economy off its hinge.
India has recorded negative GDP growth only five times in its history.
When India’s economy dipped to Red
Right before the 80s kicked in, the country was facing a colossal crisis at home with a relentless drought crushing down most parts of India. To add to its woes, crude oil prices had almost doubled up because of a supply disturbance that was a result of the Iranian revolution picking up pace in the Gulf. Until the present times, the events of 1979 were considered to be the worst in Indian history when the GDP had shrunk by 5.2 percent.
Sectors That Managed to Barely Grow
The Gross Value Added (GVA) is the contributing part from the various sectors that hold up the country’s economy that leads to the overall growth (GDP). Almost every single industry of the country’s economy continues to reel under the burden of the pandemic. All sectors registered a fall in their GVA during 2020-21 (the pandemic year) but for ‘agriculture, farming, and forestry sector’ and ‘electricity, water supply, gas, and other utility services space.’
If to be explained further, the only two sectors that managed to keep their head just above the water are the two spaces that cater to essentials – food, water, gas, and electricity. Moreover, communications, tourism, transport, and all other sectors are reported to have taken the biggest fall. Reportedly, it registered a decline of 18.2 percent in 2020 after emerging as the third-fastest growing space in the year before (2019-20).
All Eyes Set on RBI
With the country’s growth in the trench, there is going to be a build-up of added pressure on the government to revitalize the economic growth. One way of achieving that could be by increasing the money flow in the economy. And that would only fall under the ambit of the Reserve Bank of India (RBI), which has now revised its forecast for the GDP from 10.5 percent to 9.5 percent.
What Could Be the Next Step?
Usually, the central bank boosts the cash flow in the economy by either slashing down the interest rates or by easing borrowing. At least, in theory, both the measures are supposed to raise access to credit. And more credit indicates more funds, which can be further allocated for anything ranging from expansion of a factory or setting up a new one. All such measures are capable of injecting impetus into the shriveling economy to catapult it back to activity and growth.
But in contraposition, an increase in the money flow also results in inflation and even if there is more cash to flow around, it still does chase the same amounts of services and goods. It is only worth it as long as the economy thrives and remains above the rate of inflation. Also, if that is not the case, another possible way to handle the high inflation rates is to hike the interest rates which is exactly the opposite of what is required to expand the cash supply. And here only lies the puzzle.You will find more infographics at Statista
The system needs a cut in the interest rates which is the best for economic growth but inflation data may indicate otherwise – a need to raise the interest rate. How the RBI along with the Monetary Policy Committee (MPC) would figure out the credit policy now is what we are all looking forward to.
In case the panel decides to inject the economy with more cash and chop off rates of interest, it could worsen the inflation and even make basic necessities more expensive such as food and fuel that would only end up in a double whammy for the average Indian.
However, indecisiveness is not always bad. At least one expert from the Indian Council for Research in International Economic Relations (ICRIER) believes that it would be in the best interest if the MPC decides to simply wait and watch.