India’s gross domestic product (GDP) shrank by 23.9% in the June quarter—the biggest contraction since quarterly GDP figures were first published in 1996. It is also the most serious contraction among all large economies. Mint explains why.

How grave is shrinkage in  the  Indian  economy?

This is the first time the economy has contracted since India started publishing quarterly GDP figures. The previous worst was from January-March 2009, when the economy grew by 0.2%. One complicating factor is the size of the informal sector, which makes up over 50% of India’s economy. Measuring this is fraught with difficulty—but it would have only got accentuated because of the pandemic. The National Statistical Office which publishes GDP data, pointed out that lockdown restrictions had an impact “on the data collection mechanisms”. This tells us that the contraction may be worse than the 23.9% reported.

How  did  the  economy’s position get so bad?

India’s lockdown was the most stringent in the world. In a Stringency Index created by the University of Oxford, India scored 100, the highest possible value, through the first half of April. This fell after mid-April and averaged slightly below 80 until June-end. Due to the curbs, people couldn’t go out and shop much, and stuck to buying items required for daily needs only. With people unable to make purchases, businesses shut, and this led to millions of migrant workers heading home. Also, the confusion over what goods and services are essential and what aren’t led to many supply chains breaking down

Worst hit

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Worst hit

Did the lockdown help in containing the pandemic?

Given India’s limited state capacity, the curbs did not lead to the government creating systems to fight covid. An increase of nearly 80,000 cases daily is a concern. The spread of covid led to people cutting on consumption and increasing savings. Between end-March and early July, bank deposits went up by 5.1 trillion, up from 1.01 trillion, in a similar period, a year ago.

What’s the situation in other major countries?

In China, much of the pandemic spread during January to March, causing the economy to contract by 6.8% in that quarter. In many Western countries, too, some part of covid-19, spread in the January to March quarter. As a result, the negative impact was spread across two quarters. These countries are now in recession with contraction seen in two consecutive quarters. In India’s case, the pandemic started spreading only after April. Also, India’s contraction is not much worse than that in Spain and the UK.

Any other reasons why India has done badly?

India’s fiscal position doesn’t allow the government to spend its way out of trouble. At the same time, printing too much money to finance excess government expenditure and push for growth, as is happening across the world, can create problems such as high inflation. Hence, the Indian government has taken a conservative approach on this front. It’s worth noting that the Indian economy had been slowing even before the pandemic struck.

Vivek Kaul is the author of Bad Money.

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