Lockdown phase took severe toll on economic activity

India’s GDP contracted by 23.9% in the April-June quarter this year compared to the same period last year. This suggests that the lockdown’s toll on economic activity has been more severe than expected.

A Bloomberg poll of 15 economists expected the contraction to be 19.2%. India was under an almost complete lockdown for the months of April and May.

The lockdown was not the problem, but it is the manner in which it was implemented and the policy response which has followed that have made things worse, said experts.

To be sure, the GDP numbers released on Monday are only the first estimates and they could be revised downwards further.

This is because, the informal sector numbers, which are likely to have suffered more, will only become available at a later stage, Pranab Sen, India’s former chief statistician said.

The economic contraction has affected the entire non-farm economy including the government sector. Agriculture was the only silver lining with a growth of 3.4%.

Gross Value Added (GVA), which measures the value of production minus taxes contracted by 22.8%.

Even the Public Administration, Defence and Other Services sub-sector, which captures spending by the government, has contracted by 10.3%.

The contraction in government spending will only increase going forward as state governments are facing a severe resource crunch, said Himanshu, associate professor of economics at Jawaharlal Nehru University.

This will only complicate the recovery going forward, he added.

The expenditure side numbers suggest that both consumption and investment demand collapsed during the lockdown. Private Final Consumption Expenditure contracted by 26.7%.

Gross fixed capital formation, which measures investment, suffered a contraction of 47.1%.Government Consumption Expenditure, however, grew by 16.4%.

Even nominal GDP contracted by 22.6%, which means that the base of tax collection will shrink.

‘The fact that wholesale price indices are in contraction mode should have left no doubt that producer prices are declining.

This is bound to show in nominal growth numbers, said Pranab Sen.

Krishnamurthy Subramanian, chief economic adviser (CEA), ministry of finance said the economic performance in the April-June quarter is primarily due to an exogenous shock (Covid-19 pandemic) that has been felt globally, and India has already started a V-shaped recovery after the lockdown was eased.

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