Social workers distribute cooked food to people during a nationwide lockdown against the Covid-19 coronavirus in the eastern Indian state Odisha's capital city Bhubaneswar, May 5, 2020. Photo: AFP / Stringer / NurPhoto

The Indian economy contracted by 23.9% during the April-June quarter, its worst performance ever. The economy was hurt by a strict, two-month countrywide lockdown and a series of selective lockdowns imposed by states and local authorities. India started reporting gross domestic product (GDP) growth data in quarterly figures in 1996.

The economy experienced a steady slowdown over the past few years, which was exacerbated by the lockdown from March 25, bringing the chain of manufacturing, marketing, sales, transport and income to an unprecedented halt.

The worst-hit sector was construction, which declined by half during the quarter. Growth in trade and hospitality contracted by 47% and manufacturing by 10%. Transport, manufacturing, mining, construction, and services, which account for about two-thirds of the economy, had to be completely shut down because of the lockdown. Agriculture reported a growth of 3.4% because the lockdown was not as severe and prolonged in rural areas.

Earlier in the day, the government said eight core industries posted a slowdown in growth. The index of output by eight core industries – coal, crude oil, refinery products, natural gas, steel, cement, fertilizer and electricity – contracted 20.5% between April and July.

Before this, the economy contracted three times. In 1965, it shrank 2.6%, in 1972 by 5.5% and in 1979 by 5.2 %, mainly because of either crop failure or a sharp surge in global crude oil prices.

The slowing economy has also slowed the collection of taxes – central and state GST, customs, central excise, personal income tax and corporate tax. Gross tax collection in April to July declined to 3.8 trillion rupees from 5.4 trillion rupees in the same period a year ago, according to Madan Sabnavis, chief economist at CARE Ratings.

However, the Indian economy is not alone in facing the wrath of the pandemic.

Moody’s Investors Service projects a 4.6% average contraction for G-20 countries in 2020 followed by 5.3% growth in 2021. With the exception of China, growth in G-20 countries will contract this year. Advanced G-20 economies will contract by 6.5%. The US’s real GDP annualized contracted 33%, the UK’s 20.4% and Japan’s 27.8%.

But the Indian economy had been slowing even before the pandemic struck. In the January to March quarter, the country’s growth slowed to 3.1%, and for the previous full year ending March to 4.2%.

On June 1, Moody’s Investors Service lowered India’s sovereign rating by one level, citing expectations of deterioration of the government’s fiscal position, stress in the financial sector and challenges the government would face trying to overcome low growth for a sustained period of time. It maintained its negative outlook.  

The Reserve Bank of India on August 25 said economic growth would contract this year, and will take a long time to recover from the Covid-19 pandemic. Recovery will be led by private consumption. But the shock to consumption is severe and will take time to mend and regain its pre-Covid-19 momentum, the RBI said.

The economy grew more than 8% in 2016.

The decline began soon after the government introduced an ill-planned move to demonetize 86% of the value of currency notes overnight in November 2016. It removed the most used 1,000- and 500-rupee notes from circulation, leaving the common man and small business high and dry, as they typically use cash because of the nature of their transactions.

A hurriedly introduced Goods and Service Tax (GST) in July 2017 dealt another blow to businesses. The lockdown imposed to contain the Covid-19 virus was the latest blow. India today is the third-worst-affected country after the United States and Brazil. India has 3.64 million Covid cases, behind Brazil’s 3.86 million and the US’s 6.17 million.

Government spending increased sharply as it allocated more for medical facilities and relief. The migration of millions of workers from industrial centers to their villages was challenging and costly for governments at all levels.

Amidst all these challenges, China’s military encroached on Ladakh, India’s northernmost tip, and occupied several areas, adding to New Delhi’s defense expenses.  

Far-reaching impact

The pandemic will have a far-reaching impact. It has limited the government’s ability to spend over the next decade, Nikhil Gupta and Yaswi Agarwal, research analysts at Motilal Oswal Financial Services, said in a report.

The combined debt of central and state governments is likely to surge to 91% of GDP in the current year to March 2021. This will be the highest since data first became available in 1980. The level of debt is likely to remain at more than 90% up to March 2023. Debt as a percentage of GDP rose to 75% in the financial year ended March 2020, compared with 70% two years back.

Yet, paradoxically following a global trend, the stock markets are surging because of low interest rates in the US and several other advanced economies. The BSE Sensex Index rose to 38,628 from 25,981 in March.