India’s GDP contracts by 23.9%; what it means for Indian Economy, Businesses and individuals;

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Worrying numbers as official data released by the Union Ministry of statistics and programme implementation(Mospi) put India’s GDP at – 23.9% for the quarter of April – June.

While it was expected that India’s economy would be affected as is the economy of most countries in the world due to the COVID – 19 pandemic – induced lockdown, the fact is that this is the weakest growth recorded since 2015 and less than most economies in the world.

Why is GDP important?

GDP is an important indicator of how a country’s economy is performing and the size of the economy. It is an indicator of the general health of a country’s economy. An increase in GDP shows that the economy of the country is performing well. At the same time, the decline in GDP is an indication that the economy of a country is suffering.

How is GDP generated?

The wellbeing of an economy is driven by GDP, i.e., the total demand for goods and services. It is generated form four factors of growth.

  1. Consumption demand by private individuals is the most significant factor and the biggest factor
  2. Demand generated by private sector businesses
  3. Demand for goods and services generated by the government
  4. The net demand on GDP after subtracting imports from exports.

Even as the ‘unlocking’ process is on in the country, it still estimated that the full-year GDP for 2020 could also worsen.

Apart from the agricultural sector that remained steady and grew by 3.4%, all other sectors in the economy saw a severe downturn and posted negative numbers. Infrastructure and Construction (-50%) Service industry and Hospitality sector ( – 47%) Manufacturing & Production (-39%) Mining & Resources (-23%)

Employment & Jobs

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The negative pattern in the sectors, as mentioned above, is indeed a dangerous outlook, as these sectors constitute the maximum number of employment opportunities as well as steady employment. If these sectors continue their downward trend, it will result in more and more people losing their source of income, as it would rise in people losing their jobs and a possibility of failing to get another. 

Its impact would be seen in a decline in employment opportunities and a rise in unemployment numbers.

Estimates put as many as 18.9 million salaried individuals lost their jobs in April to July; this includes the daily wage earners.

In the last few years, India’s economy did not expand; at 5% growth rates; it wasn’t enough to generate jobs for 10 million young people entering the workforce every year.

Falling Incomes, consumption, and investments.

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It is reasonable that when the incomes fall or reduce the demand for products and services will also fall, savings and investments will also get impacted; when this happens, the businesses too stop investing. As supply chains get effected, many business units today are not confident about either expanding their businesses or starting new ventures.

Measures taken by the Central Bank

The RBI has cut rates by 115 base points, purchased bonds to pump money into the financial system, and transferred billions of dollars in dividends to the government.

It has taken additional steps to support the bond market. It has given leeway to lenders to hold government securities without marking them to current lower prices and has also announced measures to pump billions of dollars in extra funds.

What has happened to banks and customers

The banks have been slow to pass on the RBI’s rate cuts onto the consumers, and credit growth weakens primarily because of the fear of overhang bad debt.

While the government took steps to provide credit to small and medium-sized businesses, it is argued that instead, it should have given direct assistance in the form of tax cuts to consumers to boost demand in the short term scenario.

Steps must be taken to revive and push the economy, particularly when it comes to employment and its generation and direct assistance in tax cuts. A clear and detailed approach is needed to boost the short term demand in the economy, even as the pandemic rages on with no clear indication of abating, the country’s economic growth could see damages last for more than ten years.

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