India’s GDP has contracted five times since 1947, but never as bad as 7.3%
- India’s GDP has contracted by 7.3% over the past one year as per provisional estimates released by the National Statistical Office (NSO) on May 31.
- It’s been four decades since India’s GDP was in the red the last time, but even then the drop was only 5.2%.
- India’s GDP for 2020-21 has taken the biggest hit in the country’s history.
India’s GDP growth had already been slowing down for nearly half a decade. The unexpected onset of the COVID-19 pandemic compounded the stress on the economy with lockdowns and limitations on movement to drag the economy into the red— something that hasn’t happened since 1979.
In fact, India has only ever registered negative growth five times in its history. And most of these recessions were driven by droughts, floods or energy prices that threw the country’s primarily agrarian economy off its axis.
Advertisement“Needless to say, the economic outlook remains highly uncertain, and periodic material revisions to our growth forecasts may persist in FY2022, as was the case in FY2021,” Aditi Nayar, the chief economist at ICRA, said in a statement. “At present, we expect real GDP to expand in the range of 8-9.5% in FY2022.”
The last time India’s economy saw red
Just before the 80s kicked in, India was facing a massive crisis at home with a severe drought beating down in most parts of the country. To add to its trouble, crude oil prices had nearly doubled due to supply disruptions — a result of the Iranian revolution happening in the Gulf.
The events of 1979, until today, were the worst that the Indian economy has seen since its independence with the GDP contracting by 5.2%.
Only two sectors managed to grow — that too barely
Gross value added (GVA) is the share of contribution by different sectors of the economy towards the overall GDP.
AdvertisementNearly every single sector of the Indian economy recorded a dip in their GVA during the COVID year — except for two, ‘agriculture, forestry and farming’ alongside ‘electricity, gas, water supply and other utility services.’
Simply put, the only two sectors that were able to keep their head above water are the two sectors that provide basic necessities — food, water, electricity, and gas.
Meanwhile the tourism industry, communications, transport and other services within that bucket took the biggest hit. It recorded a dip of 18.2% in the last year after being the third-fastest growing sector in 2019-20.
Now, all eyes on RBI
With India’s GDP growth in the troughs, there will be more pressure on the government to revive economic growth. One way of doing that would be to increase the money supply in the economy. That would fall under the purview of the
Typically, the central bank improves the money supply by either cutting interest rates or by making borrowing easier. Both measures, in theory at least, are meant to increase access to credit.
More credit means more funds that can be deployed for anything from setting up or expanding a factory to buying a home or a car. All of these contribute to economic activity and growth.
On the flip side, an increase in money supply also leads to inflation — even though there is more money to go around, it is still chasing the same amount of goods and services. It’s kosher as long as the growth is well above the rate of price rise.
If it’s not, one way to tackle high inflation is to increase interest rates — the exact opposite of what is needed to increase money supply. And therein lies the conundrum.
In the interest of economic growth, the system needs an interest rate cut meanwhile inflation data may signal the need for an interest rate hike. And, how to balance this catch-22 situation is for RBI governor Shaktikanta Das and the
If the panel decides to pump in more money into the economy — slash interest rates — it could worsen inflation and make essentials like food and fuel more expensive resulting in a double whammy for the average consumer.
However, indecision isn’t always bad. One expert believes that it would be ideal for the MPC to just wait and watch. “Despite CPI [Consumer Price Index] being on the higher side the RBI is unlikely to raise interest rates any time soon, even though the current monetary policy regime primarily targets inflation,” said Alok Sheel, the RBI chair professor at the Indian Council for Research in International Economic Relations (ICRIER) in a statement.
INTERVIEW: With a partner like Mukesh Ambani's Jio, Infibeam expects to hit $100 billion in online transactions in the next 5 years
Former HDFC Bank CEO Aditya Puri and Carlyle will be among the new owners of PNB Housing Finance triggering an open offer
Popular on BI
- Realme GT Neo 2 5G review: Great performance, fine display but camera needs work
- Cisco says a company 'leader' who encouraged TikTok followers to report strippers to the IRS is no longer employed at the company
- A half-mile installation just took 20,000 pounds of plastic out of the Pacific - proof that ocean garbage can be cleaned
- G7 leaders favour CBDCs provided they ‘support and do no harm’ to central banks
- India's farmers protest takes a gruesome turn with a chilling murder at the scene — here’s the sequence of events
- Bizarre! Shubhman Gill was brought back to bat after being declared out
- Ruturaj Gaikwad and Faf du Plessis — amazing data on how the two openers led CSK to IPL 2021 championship
- Budget and safety top criteria for Chennai households during festive season:LocalCircles