GDP - The Great Depressing Pandemic
This week's article talks about the Q1 estimates of the GDP for FY21 released by the Indian government and everything that transpired after.
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“India’s GDP has Contracted”, these few words have been at the tip of the tongue of a lot of Indians in the last few days and which has resulted in several people becoming an economist overnight.
The Indian government released the Q1 estimates of the GDP for FY21 last week which showed a contraction of 23.9% YoY, what followed this was complete and utter chaos with the pro-government agents comparing the annualized GDP of the USA, Canada, and Japan with India’s Q1 (YoY) GDP contraction and the Anti-government forces comparing the YoY contraction of Indian GDP with QoQ contraction of other economies. So upon seeing the financial illiteracy amongst our countrymen, Gita Gopinath, Chief Economist, IMF, shared a picture that rightly compared India’s GDP with other economies.
Engineer Explains through this article tries to explain a few things which might help clear the doubts regarding the GDP and why did the Indian economy had such a substantial contraction.
What is GDP and how is it calculated?
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
The GDP is primarily calculated by the following formula:
GDP = C + G + I + NX
where C=consumption demand from private individuals
G=government spending
I=Investment refers to private domestic investment or capital expenditure
NX=Net Exports of the nation
Now that we have understood what the GDP is and how it is calculated let’s take a look at the share of various constituents of Indian’s GDP.
Consumption demand (C) from private individuals accounted for 56.4% of all GDP before this quarter.
Government Spending (G) accounted for 11% of India’s GDP
Investment (I) accounted for 32% of all GDP in India
Net Export (NX) which is calculated by subtracting the imports from India’s exports is mostly negative for a country like India which is heavily dependent on imports.
India was placed in a state of complete lockdown in the last week of March and it continued until the first week of May. During this unprecedented situation offices, factories, shops were shut and all the residents of our country were asked to stay at home to avoid the spread of the coronavirus. Only the essential items providing shops (i.e. pharma and FMCG) were allowed to stay open while everything else was completely shut which brought the economy to a halt. Now as we had seen above that the Indian GDP is heavily dependent on the corporates and individuals to spend money to maintain/increase its GDP, the lockdown led people to only spend on essential items hence heavily affecting our nation’s economy.
In April, the Auto sector for the first time in its history recorded ZERO sales, which had not happened during the financial crisis of ‘08 or even during the great depression of 1929. Overall the commercial vehicle sector saw an -84.8% contraction in the Q1 of FY21 when compared to the previous year.
The construction work had to be completely halted which led to the cement industry suffering unprecedented losses and leading to a contraction of 38.3% in its production when compared to the 2019 April to June quarter.
The rail and air traffic for passenger-kilometers had come to a complete standstill ( -99.5% for railways and -94% for Airways), the Net Tonne-kilometres or the number of goods carted by the railways fell by 26.7%.
The above-mentioned cases are just the tip of the iceberg but they highlight the reason why the Indian economy has contracted so drastically in a single quarter.
Most of the experts had expected a contraction of 15-20% in the GDP but -24% took everyone by surprise and has called attention to the fact that even though the lockdown allowed the states and central government to prepare for the virus and possibly saving thousands of lives in the short term, its medium to long term implications can be dreadful.
The U.S. economy shrank at a record 32.9% rate in the second quarter annualized basis, and the idea of India doing better than the USA in the second quarter was being propagated across social media platforms. It must be noted that comparing these numbers is an inaccurate analysis. While we use a YoY comparison that is comparing to the same quarter from the previous year, the USA uses a QoQ comparison, which is comparing two consecutive quarters and extrapolating the number for the year (i.e. the next 3 quarters).
Another thing that sent shockwaves across the world was that China’s Q1 GDP had shown a growth of 3%. While this caused anger in a lot of people as the virus had originated there, it was an expected result as the country had reached its coronavirus peak in the Q4 of FY20 and had hence started to unlock its economy in the last quarter. Similarly, most of the major European economies had tided over the crisis by mid-May and had started to reopen their economies with Spain even allowing Night clubs and beaches to remain open till midnight. Therefore as rightly said by Madan Sabnavis, Chief Economist at CARE Ratings Ltd., "Such comparisons would actually not be proper as we all were affected by the pandemic at different times and the lockdown has been lifted at a different pace in all countries."
The revival of the auto sector in August, the government's recent ban on the purchase 101 foreign defense equipment, the ban of 150+ Chinese apps, and the hike in the import duty of electronic items might be able to mitigate some of the losses but a full recovery is going to need a lot more than just “Atma Nirbhar” slogans and an actual solid commitment as well as grass-root level work from the state governments and the central government for the complete revival of the economy.
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