This is the worst performance of the Indian economy in any year since Independence. The last time the Indian economy contracted was in 1979-80. The GDP had contracted by 5.2% that year, when global oil prices had gone through the roof.

This time around, the negative economic impact of the spread of the covid pandemic has been the main reason behind the contraction. Let’s look at this point-wise.

1) One way of measuring GDP is by adding private consumption expenditure, the money that you and I spend on buying things, with government expenditure, investments made in the economy and net exports (or the difference between exports and imports). In the Indian case, the private consumption expenditure tends to form 55-60% of the overall economy. In 2020-21, private consumption contracted by 9.1%. This is a huge contraction. Even in 1979-80, it was limited to 2.2%. It is understandable that during a pandemic year, consumers cut down on their consumption. Individuals lost jobs. Many others were haunted by the fear of losing their jobs. Families had to spend heavily on health emergencies and so on.

The worrying bit here is that the total consumption expenditure in 2020-21 at 75.61 trillion was just 3.1% more than in 2017-18. When it comes to consumption, the economy has gone back by three years. What it also tells us is that India’s economic growth was slowing down even before the pandemic struck. This is a point that needs to be remembered.

2) When people are cutting down on their expenditure in the midst of a pandemic, it is but natural that corporates will not look to expand. The investments made into the economy contracted by 10.8%. This is understandable given that it doesn’t make sense for corporates to expand when the existing capacitates are not being properly utilized.

3) In an environment where both individuals and corporates cut down on their spending, the government tends to spend more, in order to pump-prime the economy and get economic activity and growth going again. In 2020-21, the government spending rose by just 2.9%. It had risen by 7.9% in 2019-20. The pandemic started to spread across India towards the end of 2019-20, during the months of February and March. Given that, 2019-20, for the large part, was a non-pandemic year.

Government spending increased more in 2019-20 than it did in 2020-21. This is understandable to some extent given that it isn’t easy even for the government to spend money during the middle of a pandemic.

4) The other way to look at the GDP is to look at the value added by various sectors. The services sectors which make up around half of the Indian economy contracted by 8.4%. The remaining non-services part of the economy contracted by a smaller 6.1%.

This is understandable because most services need to be offered in person and that is bound to take a beating in the middle of a pandemic where lockdowns, curfews and quarantines are the order of the day.

The worrying thing is that the total value added by services in 2020-21 stood at 67.54 trillion, which was almost similar to the value added in 2017-18. This basically means that the pandemic has ensured that the size of India’s services economy has gone back by three years.

5) The small good news in all this is that the GDP grew by 1.6% between January and March 2021. The question now is how 2021-22 will pan out. Up until early February, when the second wave of covid hadn’t really struck, most economists had been predicting a growth of 11-13% in 2021-22. As of now, they have cut their forecasts to around 9-10% growth.

This, of course, comes with the assumption that there will be no third wave of covid. Also, the real economic impact of the second wave of covid has not yet started to show up in the economic data, which it will over the next few months. Hence, the growth forecasts are more than likely to be revised downwards.

It is worth remembering here that second wave has been much bigger and much more disastrous than the first wave. Many families have ended up exhausting their savings in fighting the pandemic. Many other families are in debt. Those who haven’t been directly impacted by the second wave are scared because of the possible third wave and are saving up for that.

Also, during the first wave, rural India didn’t get impacted much. This time that is clearly not the case. And given the weak data collection mechanism, it is very difficult to figure out how bad the situation really is in rural India.

In this scenario, it is more than likely that consumer spending, which forms the bulk of India’s economy, will continue to stagnate. Also, the state governments are in a mood of once-bitten-twice-shy, and will be reluctant to open their economies quickly, because they don’t want covid cases to start rising all over again. And more importantly, they fear the third wave. In this scenario, the services sector will continue to remain on a weak wicket.

To conclude, before 2021-22 started, many economists expected the GDP for this year to be greater than the GDP for 2019-20 ( 145.69 trillion). They expected the Indian economy to be back where it was before the pandemic struck. But from the looks of it, that’s now not going to happen in 2021-22.

We will have to wait for 2022-23.

Vivek Kaul is the author of Bad Money.

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