Months after the coronavirus induced lockdown and the follow up unlock, GDP data likely to be released later today will paint the extent of damage to the economy and give an idea of the critical course correction required. High labour migration, job losses, and poor investment atmosphere is likely to push the already slowed economy into a tight corner.
Economists project the GDP may decline by 19.2 per cent in the April to June quarter from a year ago, the sharpest contraction since the nation started publishing quarterly figures in 1996. India’s FY20 GDP had declined to 4.2 per cent from 6.1 per cent in FY19, the slowest in the last 11 years.
Here are some of the contributing factors that triggered the fall
Rising retail inflation
Retail inflation spiked to 6.93 per cent in July this year on account of higher food prices, the data released by the Ministry of Statistics & Programme Implementation (MoSPI) showed. The inflation had grown beyond the RBI’s upper ceiling of 6 per cent due to a rise in pulses and products prices that saw a 15.92 per cent on-year rise in July, the meat and fish segment saw a rise of 18.81 per cent, while that of oils and fats rose 12.41 per cent.
The retail inflation which is measured by the Consumer Price Index (CPI) for the month of June was also revised to 6.23 per cent from 6.09 per cent, the data revealed. The government had in April revised the CPI data for the month of March to 5.84 per cent from 5.91 per cent. Meanwhile, the Consumer Food Price Index (CFPI) surged to 9.62 per cent in the month of July.
Contracting services, PMI
India’s dominant services industry, a key driver of economic growth, shrank for a fifth straight month in July as lockdown hit industries struggled to resume operations. The Nikkei/IHS Services Purchasing Managers’ Index increased to 34.2 in July from 33.7 in June, however, it was still well below the 50-mark separating growth from contraction. July was the fifth straight month the index was sub-50, the longest such stretch since a 10-month run to April 2014. A composite PMI, which includes manufacturing and services, indicated an ongoing deep contraction in the economy, falling to 37.2 from June’s 37.8. However, firms remain pessimistic about the next 12 months and cut jobs at the fastest pace on record.
The Monetary Policy Committee (MPC) rapidly changed its monetary stance from calibrated tightening to neutral to accommodative as the pandemic continues to batter the economy. The RBI in its annual report raised the prospect of deep negative growth in GDP for the Jun-20 quarter and the Sep-20 quarter. India was also impacted by low levels of per capita income, dependence on urban India for jobs, and the lack of social security. This could impact medium-term demand. The central bank in its report maintained that the $6.5 trillion liquidity boost has created a big problem of asset inflation. It noted that consumer confidence had fallen to an all-time low. Urban consumption has dropped by a third.
India’s dominant services industry, a key driver of economic growth, shrank for a fifth straight month in July as lockdown hit industries.
GST shortfall: States under pressure
Finance Minister Nirmala Sitharaman, stating that the “Act of God” may result in contraction of economy, said the GST shortfall in FY21 may be around Rs 2.35 trillion and gave two options to states for compensation. The first option presented to the GST Council was on providing a special window to states, in consultation with RBI, for borrowing Rs 97,000 crore at a reasonable interest rate. The second option before the states is to borrow the entire Rs 2.35 trillion shortfall under the special window. Compensation payments to states are pending for the four months of this financial year — April, May, June, and July amounting to Rs 1.5 trillion. Compensation payments to states started getting delayed since October last year as GST revenues started to slow down. The Covid-19 pandemic has widened the gap, with GST revenues declining 41 per cent in the April-June quarter.
Break in the supply chain
The Covid-19 lockdown opened India’s eyes to the need for a domestic supply chain as the break in the cycle resulted in critical industries facing raw material shortfall even as the government claimed of smooth machinery. With the lockdown hitting core sectors, India is now advocating developing a domestic supply chain as part of Atmanirbhar Bharat.