Moneycontrol PRO
UPCOMING EVENT: Tune into watch a landmark event in India’s quest for sustainability, 5.30 pm onwards. Click here.

India's GDP contracts 23.9% in Q1FY21 as lockdowns, restrictions bludgeon economy

From manufacturing to real estate, from hospitality to mining, all segments except agriculture in deep red as economy records sharpest drop in 41 years.

September 01, 2020 / 07:14 AM IST

The Indian economy shrank 23.9 percent during the April-June quarter this year, confirming fears of a crippling slide across several industries and services that are profusely bleeding through multiple deep cuts caused by COVID-19-induced disruptions.

National income accounts data released on August 31 showed that India's "real" or inflation-adjusted gross domestic product (GDP) contracted 22.6 percent, the sharpest drop in 41 years, compared to a growth of 8.1 percent in the same quarter last year.

If GDP growth falls again in the current quarter (July-September), India would technically be in a recession, an economic state characterised by at least two successive quarters of contraction, underscoring the pandemic's bludgeoning impact on a country that until not-too-long-ago was the world's fastest growing major economy.

India was in a recession last in 1979 when the real GDP fell 5.2 percent.

The agriculture sector, aided by plentiful summer rains this years, however, stood out as a beacon of hope, growing 3.4 percent in the first quarter of 2020-21 from 3 percent last year, but wasn’t strong enough to offset the damages in other segments, all of which appear to have fallen off a steep cliff, data released by the National Statistical Office (NSO) showed.

COVID-19 Vaccine

Frequently Asked Questions

View more
How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

View more

The manufacturing sector contracted 39.3 percent from a growth of 3 percent last year, while the mining sector shrank by 23.3 percent from a growth of 4.7 percent last year, reflecting the collective shuttering of operations forced by lockdowns.

Gross Value Added (GVA), which is GDP minus taxes that experts consider as a more realistic proxy to gauge economic activity, contracted 22.8 percent in April-June 2020 compared to 4.8 percent growth last year, as the lockdown bore an effect very similar to a mechanical hard stop on a running device.

Unlike other recessions caused by systemic flaws such as the debt bubble of 2008, the current fall has been brought upon by a medical emergency that forced factories to shut down because people should stay at home to contain the virus’s spread.

The construction sector contracted 50.3 percent compared to a growth of 5.2 percent last year as roads and infrastructure projects grinded to halt for most part of April-June 2020-21. The real estate sector, which had to stop overnight because areas with large gatherings had to be emptied out, also was severely affected. The sector, along with financial and professional services, shrank 5.3 percent in April-June 2020, emblematic of the lockdown’s impact on realty projects, walloped by a severe cash crunch and the plummeting demand for houses.

The COVID-19-forced restrictions have also dealt a colossal blow to restaurants, shops, hotels and traders all of who have seen their businesses nosedive dramatically as people stayed put at home, stopped eating and travelling out, and export shipment orders dried out from overseas destinations. Trade, hotels, transport, communication and services related to broadcasting contracted 47 percent in the first quarter of 2020-21 compared to a 3.5 percent growth last year, the national income data showed.

The GDP numbers will upset the government’s fiscal math that may force major changes in the public finance estimates. In the budget for 2020-21, finance minister Nirmala Sitharaman had assumed nominal GDP growth of 10 percent in 2020-21, and fiscal deficit of 3.5 percent of GDP, a goal that looks almost unthinkable to achieve given the rapid turn of events. The finance minister had posited India’s tax revenues will grow by 12 percent in 2020-21 compared to the previous year. She had pencilled in a non-tax revenue growth at 11.4 percent to Rs 3,85,017 crore.

The math had also set some very tall targets from receipts such as divestment (Rs 2.1 lakh crore), spectrum and other proceeds from telcos (Rs 1.33 lakh crore). All of these, and many more, would need a serious re-examination.

Gaurav Choudhury
Gaurav Choudhury
first published: Aug 31, 2020 05:39 pm