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GDP Data Q1FY21: Indian economy officially contracts. Time for demand-focussed stimulus

GDP Data Q1FY21: With the economy now officially entering contraction, the focus should be to revive growth. Experts believe that greater capital expenditure has a higher multiplier effect

August 31, 2020 / 10:46 PM IST

The gross domestic product (GDP) growth for the April-June quarter contracted 23.9 percent against a growth of 5.2 percent in the same period last fiscal.

Indian economy officially entered contraction zone as economic activiy crippled following the nationwide lockdown that was imposed in March to tackle the spread of the COVID-19 pandemic.

To tide over the economic fallout of the pandemic and subsequent lockdown, the government in May announced a nearly Rs 21 lakh crore stimulus package.

Even before the pandemic struck, the Indian economy was experiencing a slowdown as it grew at 4.2 percent in FY20.

Most of the announcements made so far, attempt at restarting the economy with reforms on the supply side. The relief package provided immediate relief in the form of tax deferrals, cash transfers for the poor, and regulatory forbearance.

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As part of the package, the government also announced credit guarantees for micro, small and medium enterprises (MSMEs), transfer of foodgrain to the poor, regulatory changes to prevent bankruptcies, among others.

The steps attempted minimise the economic impact of the pandemic and provide a cushion to deal with the lockdown.

A supply-side intervention attempts to clear supply-side bottlenecks in the economy to generate demand. However, a demand-side seeks to revive demand by generating economic activity.

With the economy now officially entering contraction, the focus should now be to revive growth. Experts believe that greater capital expenditure has a higher multiplier effect.

The focus of the government now would have to be on higher public investments in infrastructure, which would allow global supply chains to invest more. Announcement of new projects, increased construction activity, timely payment, and initiation of fresh projects are some of the ways in which demand could be generated in the economy.

Former NITI Aayog Vice-Chairman Arvind Panagariya stated on August 8 that the nation is going to possibly require 'a little bit of stimulus' on the demand side as the country's economic activity begins to expand.

Kamalika Ghosh
first published: Aug 31, 2020 06:23 pm