Indian GDP Shrunk by 23.9% in First Quarter 2020 – But Why?

A study on why Indian GDP Shrunk by 23.9% in the first quarter of 2020: Hit by the Covid-19 pandemic, India, the world’s fifth-largest economy has been turned into the second-worst performer in the Covid-19 hit the quarter of the financial year 2020-21. India’s Gross Domestic Product (GDP) has shrunk by 23.9% in the first quarter of the financial year 2020-21.

Generally in forecasts, it is of rare occurrence to find the negative performances beating the downward trends. But that is exactly what has happened in the first quarter as although a negative GDP was predicted but nothing close to wiping out 1/4th of the GDP. Today, we take a look at the reasons behind the decline and the possible future.

(Image Credits: BusinessToday.in)

Why did the Indian GDP Shrunk by 23.9%?

Earlier, when this issue of the state of the economy came up at the 41st GST Council Meeting on Friday, Finance Minister Nirmala Sitharaman looked into the celestial factor and stated:

“This year we are facing an extraordinary situation…we are facing an act of God which might even result in the contraction of the economy.” – Nirmala Sitharaman, Finance Minister

Now, let us look into some of the hard facts. The Indian economy suffered due to the nationwide lockdown imposed. This was during the April- June quarter of which the lockdown covered a major portion. India had one of the longest and strictest Covid-19 lockdowns in the world. And unfortunately enough also suffered is suffering through the worst economic consequences. In comparison to other countries around the globe, India has been one of the worst-hit.

In order to understand how exactly the GDP was affected and how it can recover, we must first take a look at the components that form a part of the growth. These are consumption, government expenditure, investment, and the nation’s current account deficit (imports – exports).

1. Consumption generally has the greatest impact on GDP. In the last quarter, consumption accounted for 56.4 percent of the country’s GDP. But when compared to figures from 2019 there is a drop of Rs 5,31,803 crore in private consumption or 27 percent. This has been one of the major reasons as to why the GDP has contracted. This is because people simply are not willing to consume more as most expect tougher times ahead.
2. The Investment portion made up 32 percent of India’s GDP. This portion too fell by Rs 5,33,003 crore in comparison to last year. When coupled consumption these two components made up for 88 percent of the total GDP shrinkage 
3. The government expenditure share of the GDP stood at 11 percent. This component rose by 16% due to the relief measures provided by the government. This increase in expenditure, unfortunately, could not make up for the total decline from the consumption and investment portion.
4. The current account deficit which historically has always been in negative recorded positive rates. But this too was not due to exports exceeding regular imports. It was simply due to the lack of imports due to a lack of demand.

Image: P. Chidambaram (Member of Parliament, Rajya Sabha)

The National Statistical Office (NSO) in an official statement released that “The GDP has shrunk from Rs 35.35 lakh crore in Q1 of 2019-20 to Rs 26.90 lakh crore in the first quarter of Q1 of 2020-21, showing a contraction of 23.9 percent as compared to 5.2 percent growth in Q1 2019-20,”.

What does the future hold for the Indian economy?

The future of the Indian economy depends on how well is the purchasing capacity distributed among the general public. This is generally spread out by the income earned by the citizens.

But the pandemic has rendered millions jobless forcing them to cut back on their spending habits. This reduces the consumption portion. When there is a fall in consumption businesses avoid making investments as they already are aware of the lack of demand. These two portions, unfortunately, depend on individuals as they cannot be forced to spend. One factor that can be controlled is government expenditure in order to boost the GDP.

But unfortunately, enough even prior to the pandemic the government had already exceeded their resources by borrowing. The only option remains is to keep borrow from the RBI which has maintained amounts close to 18% of the GDP as a reserve. An infusion will provide some relief and may get the consumption portion moving as long as inflation is kept on check.

For the remaining quarters to come analysts have predicted that even though the GDP will improve but will still keep performing negatively. This recovery phase is expected to also likely extend into the first half of 2022. But these estimates depend on current figures and will change depending on how deeply COVID-19 outbreaks occur throughout the country

Aron Almeida

Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.