Analysis: GDP growth in 2019-20

Reading time: 8-10 minutes.

The covid-19 has an exacerbating impact on the world and domestic economy. The lockdown enforced has shown its effects on the economy and will have a major impact on the future economy but the latest report includes data of Q4(January-March). Thus it is vital to understand why did the economy hamper before the pandemic.

NSO is the central statistical agency of the Government which is responsible for the development of statistical information for the Government and other users for information on which to base policy, planning, monitoring and management decisions.

NSO released a report of GDP growth in Q4 of the financial year 2019-2020. The Jan-March GDP figure is the first major official estimate of the outbreak impact on the Indian economy which also showed that irrespective of corona virus the Indian economy was already slowing down. For instance, two-wheeler sales fell astutely in March. Bajaj Auto reported a 38 % decline in sales in March. It sold only 2.42 lakh units in March, 2020 when compared with 3.93 lakh two wheelers in March last year.

Report proclaims India’s economic growth has slowed to an 11-year low of 4.2% in 2019-20. The NSO’s had brought down its calculation down to 5%. The Indian economy grew at 6.1% in 2018-19. Growth rate in terms of Gross Value Added, slowed to 3.9% in 2019-20 from 6% growth in the previous year. Gross value added is the value of output less the value of intermediate consumption. It’s  used for measuring the contribution of a particular sector. The nominal GDP growth rate, which counts for inflation, is projected to have grown at 7.2%.

In quarter 4(January-March), the growth rate fell to 3.1%. Agriculture and mining sectors managed to grow at rates of 5.9% and 5.2% in Q4. Agricultural and mining sectors were the pillars of the final quarter. Public administration, defence and other services grew at 10.1%. The three elements of demand have also dropped i.e. consumption demand has slowed, whilst investments and exports are both in negative areas. The manufacturing sector shrinked to a negative growth of 1.4%. It has been previously in the said, that for India to grow and create jobs, manufacturing growth has to rise.

GDP is an indicator of economic activity in a country, total worth of a country’s annual output of products and services. It provides the economic output from the consumers’ perspective.

Factors affecting GDP are:

  • 1. Capital flows and exchange market: India attracts investors. With such a large population there’s a large probability for a thriving business. As a result of these factors the capital keeps flowing in India and therefore the exchange rates also facilitate.
  • 2.Political changes: The new governance brings in new changes and new policies. These policies play a vital role in dynamic the import/export situation impacting the value.
  • 3.Global currency trends: The currency of India is more or less interlinked with rest major countries just like the USA, Britain and Japan. If the domination of those countries falls, then the worth of local currency is guaranteed to fall. Similarly, if the worth rises, then it affects the Indian economy as most cash depends on forex.
  • 4. Demographic and economic condition Rates: If the population is high, job creation will be more and more will be poverty. If unemployment is more the government will have to come up with schemes giving more subsidies and money to the vulnerable, causing excess outflow of money.
  • 5.Taxation System: Plays a serious role. If the system is straightforward and clear it’ll produce huge reserves which will ensure money in the economy creating demand and enhancing the GDP.

GDP is a crucial indicator of overall economic activity. A sharp fall in economic process conjointly suggests  retardation of business growth, rising unemployment and, attributable to these reasons, increasing stress on the banking sector. This conjointly indicates slowing demand within the economy. Once economic output falls and firms struggle to form cash, they’re forced to lay off workforce and rationalise prices. Banks got to put aside more cash to cover bad loans. This puts pressure on their capital and banks turn cautious on granting additional credits to corporations. In short, a retarding economy creates a vicious circle within the financial system.

India’s policy to boost economy

The slowdown in the Indian economy has bottomed out and solutions taken by the administration in the ongoing financial plan to improve ability to spend in the rural sector, infrastructural growth and welcoming foreign ventures for boosting the development of the economy in which there will be tax reductions. The infrastructure part is another territory where there is a lot of opportunity for the economy. The government’s focus on recreating and repairing the real estate sector by introducing the Special Window for Affordable and Mid-Income Housing (SWAMIH) Investment Fund, The PM Kisan Yojna, under which a salary backing of Rs 6000 every year will be given to all farmer families the nation around, will likewise get enough liquidity in the rural sector. Liquidity in the rural part is of  higher priority than anyplace else as the marginal propensity to consume is significantly higher in the rural sector than elsewhere. Once demand related issues are taken care of, it will help in boosting development.

The government was concentrating on augmenting consumption to help development and featured measures, for example, cutting corporate tax, capitalisation of public banks and giving subsidies to realty undertakings. To help financial institutions and housing finance companies, the government has sanctioned Rs 4.47 lakh crore. Further the stimulus of 20 lakh crore aimed at protecting the MSME’s which constitutes a vital part of economy.

What should the government do?

If the economy as a matter of fact shrinks and if that remains so for three consecutive quarters, the economy will be in a recession phase. The government will have to then come with a major fiscal impetus to restore the economy.

A major part of the economic boost tends to be  in the form of loans under varied schemes. Government will have to come with a different financial package if the economic growth shrinks and unemployment rises further. Government will have to induce money and create demand in every sector. The government should focus on sectors such as oil and automobile. Because these are two major sectors suffering and have max capacity to flourish. As of now crude oil is cheap, India should sell at the current price, create reserves and then pump the economy and generate demand and employment. The weak commodity prices and import demand would help provide some support to growth. The government expenditure will be the game changer and reason behind the growth engine in 2020-21.

Conclusion

To sum up considering India’s economy at present although, is slowing and due to the pandemic it will further go down but the future of Indian economy is vivid as more than 1000 companies are planning to invest in India which will result in increased demand and higher employment, additionally increased capital flow. Lastly the principle of self-reliance will help in lowering the imports. Local manufacturing will allow more employment, subsidies for the business. Higher employment will lead to demand for goods and restoring the GDP.

Author: Samarth Garg from Maharashtra National Law University, Mumbai.

Editor: Silky Mittal, Junior Editor, Lexlife India.

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