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Insights into Editorial: GDP shrinks by 7.3%; Q4 uptick moderates 2020­21 carnage

 

Context:

India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21, as per provisional National Income estimates released by the National Statistical Office, marginally better than the 8% contraction in the economy projected earlier.

GDP growth in 2019-20, prior to the COVID-19 pandemic, was 4%.

The Gross Value Added (GVA) in the economy shrank 6.2% in 2020-21, compared to a 4.1% rise in the previous year.

The Indian economy’s resilience will be tested by its ability to overcome a devastating outbreak of Covid-19, although no one’s yet doubting its potential to pull off the world’s fastest pace of growth among major economies this year.

 

About Gross Domestic product and Gross Value Added:

  1. GDP is a measure of economic activity in a country. It is the total value of a country’s annual output of goods and services. It gives the economic output from the consumers’ side.
  2. GVA is the sum of a country’s GDP and net of subsidies and taxes in the economy.
  3. GVA is defined as the value of output minus the value of intermediate consumption and is a measure of the contribution to growth made by an individual producer, industry or sector.
  4. It provides the rupee value for the number of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
    1. Gross Value Added = GDP + subsidies on products – taxes on products.

 

Technically recession in first half of 2021:

  1. Only two sectors bucked the trend of negative GVA growth — agriculture, forestry and fishing, which rose 3.6%, and electricity, gas, water supply and other utility services (up 1.9%).
  2. Though this is the bleakest performance on record for the economy, the fourth quarter (Q4) of 2020-21 helped moderate the damage, with a higher-than-expected growth of 1.6% in GDP.
  3. This marked the second quarter of positive growth after the country entered a technical recession in the first half of the year.
  4. GDP had contracted 24.4% in the April to June 2020 quarter, followed by a 7.4% shrinkage in the second quarter.
  5. It had returned to positive territory in the September to December quarter with a marginal 0.5% growth.
  6. GVA from trade, hotels, transport, communication and broadcasting-related services recorded the sharpest decline of 18.2%, followed by construction (-8.6%), mining and quarrying (-8.5%) and manufacturing (-7.2%).

The biggest hit from the second wave of Covid infections has been to demand, with a loss of mobility, discretionary spending and employment, the Reserve Bank of India said earlier this month.

The central bank, which will review interest rates later this week, has kept monetary policy loose and injected liquidity into the system to support growth.

 

GDP and GVA depends on extent of recovery in informal sector:

According to the Centre for Monitoring Indian Economy–a think tank–the unemployment rate grew from 6% in March to 8% in April.

Studies show that more than 200 million Indians are expected to fall into poverty as a result of shutdowns and healthcare costs. The S&P has now downgraded Indian GDP growth to 9.8%.

  1. The restrictions across States have had an impact on activity, the CEA said the second wave seems to have peaked on early May and is on the decline, so it is anticipated that lockdown-like curbs will reduce and eventually be removed, which will help the return of economic activity.
  2. With a lower contraction in GDP as well as GVA in 2020-21, the sharp recovery projected for 2021-22 by a number of agencies like the IMF at 12.5% and the RBI at 10.5% may have to be moderated.
  3. The combination of the second wave and the revised base effect may imply a lower GDP growth for the Indian economy for 2021-22, may be in the range of 9-9.5%.
  4. The extent of recovery in the performance of the informal sectors in Q4 FY2021 remains uncertain, and we continue to caution that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors.
  5. Recovery hopes will hinge on the duration for which localised restrictions will persist in coming months and whether an accelerated pace of vaccine rollout can prevent a third Covid surge.

 

India’s fiscal deficit in 2020-21 lower than expected:

  1. India recorded a fiscal deficit of 9.3% of GDP in 2020-21, 0.2% lower than the revised estimate of 9.5% of GDP, according to the Controller General of Accounts (CGA).
  2. Total revenue receipts turned out to be about Rs.88,000 crore higher than estimated, driven largely by higher excise and customs collections, while total expenditure was Rs.61,000 crore more than the revised estimate. The revenue deficit for the year was projected at 7.42% of GDP by the CGA.
  3. The slightly better than expected fiscal performance doesn’t necessarily bode well for this year’s fiscal pressures, despite the Reserve Bank of India’s significantly higher than expected dividend of Rs.99,000-odd crore.
  4. The government has set a target to reduce the fiscal deficit this year to 6.8% of GDP.

 

Conclusion:

Considering the current COVID situation, the statutory timelines for filing the requisite financial returns of fourth quarter have been extended by the Government.

The second wave of COVID-19 could delay some marquee disinvestment plans, which poses the biggest risk to the budgeted level of receipts this year.

While tax receipts would be affected due to the anticipation of a prolonged second wave impact on sentiment, the government may have to keep spending to prop up demand through a combination of free food grains, cash transfers and higher MGNREGA outlays