India’s GDP fall, in perspective

Omicron effect:

On Monday, the Indian government released its latest estimates of economic growth for the last financial year that ended in March 2021. India’s GDP contracted by 7.3% in 2020-21. To understand this fall in perspective, remember that between the early 1990s until the pandemic hit the country, India grew at an average of around 7% every year.

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There are two ways to view this contraction in GDP.

One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.

The other way would be to look at this contraction in the context of what has been happening to the Indian economy over the last decade — and more precisely over the last seven years, since the Prime Minister Narendra Modi-led government just completed its seventh anniversary last week.

Seen in this context, the latest GDP data suggests that it is not an outlier. Instead, if one looked at some of the most important variables in the data, India’s economy had been steadily worsening during the current regime even before the Covid-19 pandemic.

So has the Indian economy fared better during the seven years of the present government?

Perhaps the best way to arrive at such a conclusion is to look at the so-called “fundamentals of the economy”. This phrase essentially refers to a bunch of economy-wide variables that provide the most robust measure of an economy’s health. That is why, during periods of economic upheaval, you often hear political leaders reassure the public that the “fundamentals of the economy are sound”.

Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.

Let us look at Chart 1, provided in the Reserve Bank of India or RBI’s Annual Report for FY21 that was released on May 27. The chart maps the turning points in India’s growth story.

Two things stand out. After the decline in the wake of the Global Financial Crisis, the Indian economy started its recovery in March 2013 — more than a year before the present government took charge.

But more importantly, this recovery turned into a secular deceleration of growth since the third quarter (October to December) of 2016-17. While RBI does not state it, the government’s decision to demonetise 86% of India’s currency overnight on November 8, 2016 is seen by many experts as the trigger that set India’s growth into a downward spiral.

As the ripples of demonetisation and a poorly designed and hastily implemented Goods and Services Tax (GST) spread through an economy that was already struggling with massive bad loans in the banking system, the GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.

In January 2020, as the GDP growth fell to a 42-year low (in terms of nominal GDP), PM Modi expressed optimism, stating: “The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back”.

As an analysis of key variables suggests, the fundamentals of the Indian economy were already quite weak even in January last year — well before the pandemic. For example, if one looks at the recent past (Chart 2), India’s GDP growth pattern resembled an “inverted V” even before Covid-19 hit the economy.

Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy. As the red curve in Chart 3 (above) shows, at a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started. As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.

This is the metric on which India has possibly performed the worst. First came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetisation and the one that saw the introduction of GST. Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of total employment declining in independent India’s history.

India’s GDP has contracted five times since 1947