Financial Analytics

What Does the 24% Shrink in India’s GDP Mean?

The worst year of the twenty-first century is shaping up to be 2020. Everywhere you look, you can see the chaos and devastation. The globe is at war with an undetectable adversary that has placed knives in people’s throats. When leaving one’s home is forbidden, the atmosphere is reminiscent of a battle. When you step outside, the Corona explosion will happen. Globally, the number of infections is rising and is getting close to 30 million, while the number of fatalities is increasing to one million.

Speaking specifically about India, there are roughly one lakh infections per day. In India, the coronavirus has claimed more than 70,000 lives. The economies have been significantly impacted, impacting nearly every sector. Many are concerned about the most recent GDP disclosure.

Throughout the last forty years, India’s GDP growth has been at its lowest -24%. Even more pitiful is the expansion of the various economic sectors. The situation has worsened as predicted, and there has been negative growth.

What is GDP and How is it Calculated?

Gross Domestic Product, or GDP for short, is the sum of the value of the commodities and services a nation produces over a specific period. The period used to calculate GDP can be a year or a quarter. A metric used to assess a nation’s economic health is its GDP. GDP growth, decline, and shrinkage are indicators of a nation’s progress. Understanding the market and subsequent action by investors and public officials are two other significant uses of GDP data. Governments create policies based on GDP growth rates and provide investors with marketing data to help them choose better investment opportunities.

Many economies use different methods for calculating GDP figures.

Every quarter of a fiscal year is used to compute it for India, and at the end of the fiscal year, annual figures are issued. Data gathering for the computation is the responsibility of the Central Statistics Office (CSO). The two approaches for calculating GDP are the expenditures-based method and GDP at factor cost. Moreover, the real GDP is determined after accounting for inflation, while the nominal GDP is computed using the current market price. Whereas the GDP at factor cost shows the performance of various industry sectors, the GDP based on expenditures shows the various parts of the economy.

What do the Numbers say?

The estimates of the gross domestic product for the first quarter of the fiscal year 2020–21 were made public by the National Statistics Office on August 31, 2020. As it should have, this statement attracted attention and made headlines. It is remembered as the weakest growth in the previous 40 years. All industries, except agriculture, have had negative growth throughout this time.

Construction experienced growth of -50%, followed by trade, hotels, and other services (-47%), manufacturing (-39%), and mining (-23%); it should be noted that these industries are those that provide the majority of new jobs in the nation. Nonetheless, compared to the prior quarter, the agriculture sector witnessed a gain of 0.4%.

Demand from private persons, demand created by private sector enterprises, demand from the government, and lastly, the net demand on GDP after deducting imports from exports are the four factors that contribute to growth in every economy.

The Scenario at the Global Level

Since the entire world is in a crisis, all economies have experienced negative growth but for China. Today’s business published an infographic indicating that the G-7 nations’ economies, along with those of India and China, were contracting. According to the infographic, the UK’s economy shrank by 21.7%, while the USA, the nation most affected by the coronavirus outbreak, shrank by 9.1%. The French economy shrank by 18.9%. China, on the other hand, experienced a 3.2% gain.

The Reason Behind and the Way Out

Every event has a purpose, and this one does too. It’s not at all mysterious. The Coronavirus outbreak has disrupted daily life. These figures cover the first three months of the fiscal year or the first quarter. The government imposed a global lockdown in the first two months of this quarter, April and June. This indicates that there were no running businesses. People were not permitted to move, and businesses were closed. The Indian Railways’ operations were entirely suspended, which had never happened in the country’s history—not even during times of war. Unfortunately, Unlock 1.0 was only implemented in June, the third month. Although not fully, economical operations were becoming more open.

The exit appears like a difficult hill to climb when you consider all the statistics and the cause of the contraction. There is now no coronavirus vaccine, so a second wave of infections could strike at any time. Private businesses won’t show much enthusiasm for investing. Private persons lack the resources to acquire; hence there will be a high demand for this engine. Everyone is looking to the government to raise demand, supply resources, or open up employment prospects.

Final Thoughts

India’s economy is experiencing a sharp fall, and recovery might take years. The administration is facing significant difficulties due to the rising unemployment rate. The second quarter’s resurgence will be exciting to see. India’s economy will formally be listed as in recession if it shrinks for two consecutive quarters. This doesn’t seem implausible, given that Fitch expects it to shrink by 10.5% this fiscal year.

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