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Decoding India’s GDP contraction



In 2020-21, India’s Gross Domestic Product (GDP) shrank by 7.3 %. India grew at a rate of roughly 7% per year between the early 1990s and the outbreak of the epidemic. 

There are two ways to look at this as an outlier: one is to wish it away, and the other is to consider it in the context of the last decade.

According to CNN’s Ravi Agrawal, India’s economy has been slowly deteriorating under the current leadership, even before the COVID-19 outbreak. 

So, how has the Indian economy fared during the current government’s seven years in power? The so-called “fundamentals of the economy” are a bunch of economy-wide variables. They provide the most robust measure of an economy’s health. Let’s look at the most important ones.

Gross Domestic Product

For the past five years, India’s GDP growth rate has been a source of increasing concern. Following a period of contraction following the Global Financial Crisis, the Indian economy began to rebound in March 2013. Since the third quarter of 2016-17 (October to December), the rebound has transitioned into a secular slowing of growth. 

Many experts believe that the government’s decision to demonetise 86% of India’s currency overnight on November 8, 2016, was the catalyst that sent India’s growth into a downward spiral. The GDP growth rate steadily declined from over 8% in FY17 to under 4% as the ripples of demonetisation and a poorly conceived and hastily implemented Goods and Services Tax (GST) spread through an economy already struggling with large bad loans in the banking system. 

GDP per capita

At a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17. As a result, India has been losing out to other countries. Bangladesh has overtaken India in per-capita-GDP terms.

Unemployment rate

In India, the total number of employed persons declined by 9 million between 2012 and 2018. In the years preceding up to Covid-19, India began to see unemployment rates close to 6% -7 % regularly, compared to the average of 2% -3 %. With dismal economic forecasts, unemployment is expected to be the government’s major concern for the rest of its term. The labour force participation rate, which measures how many people look for work, has been declining.

Inflation rate

Oil prices plummeted from a high of $85 in 2015 to a low of around (or around) $50 in 2017 and 2018. However, India has been experiencing continuously high retail inflation since the fourth quarter of 2019. Even demand destruction caused by Covid-19-induced lockdowns in 2020 could not stop the inflationary spiral. In its forthcoming credit policy review on June 4, the RBI is expected to avoid reducing interest rates (despite slowing growth). 

Fiscal deficit

The fiscal deficit is essentially a measure of the government’s financial health. It keeps track of how much money a government needs to borrow from the market to fulfil its obligations. On paper, India’s fiscal deficit levels were just a touch higher than the established guidelines, but it was an open fact that the fiscal deficit was significantly higher than what the government publicly claimed even before Covid-19. The government conceded that it had been underreporting the fiscal deficit by almost 2% of India’s GDP.