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Sunday, October 24, 2021

Pandemic’s impact on Bharat’s growth

The GDP of Bharat has de-grown by 7.3% for FY21 as against a positive growth of 4.1% in FY20. De-growth of 7.3% is known to have been better than the estimate of -8% forecasted by many experts. Decline by -7.3% in GDP growth interprets that Bharat has produced the value of goods and services worth 92.7% in FY21 versus FY20.

This is not the first time that we witnessed blemishing GDP results in Bharat history however this de-growth has occurred after 4 decades owing to severe once in 100 years pandemic.

Chart I
Domestic Product 2018-19 2019-20 2020-21 YoY FY20 YoY FY21
 GVA at Basic Price (Cr) (1)         127,44,203         132,71,471         124,53,430 4.1% -6.2%
Net Taxes on Products (Cr) (2)           12,59,114           12,97,797           10,59,310 3.1% -18.4%
 GDP (Cr) (1+2)         140,03,317         145,69,268         135,12,740 4.0% -7.3%

Table I

Bharat GDP currently stands at Rs. 135,12,740 Crores in FY21 vs Rs. 145,69,268 Crores in FY20. GDP reflects de-growth of 7.3% YoY in FY21 over a positive growth of 4% YoY in FY20. On the other hand, GVA at base price (2011-12) has de-grown by 6.2% YoY in FY21 over a positive growth of 4.1% YoY in FY20. GVA is the value of total output of all sectors in economy before adjusting taxes. See table I.

The Growth Story

Covid-19 pandemic has shook the countries across the globe as their economies have been severely impacted. Nevertheless, the transmissibility and severity of virus mutations have pronounced on consumer sentiments. The virus has claimed 37 lakh deaths worldwide including 3.46 lakh in Bharat. Unfortunately 14 lakh active cases still prevail in Bharat till date.

Ever since the pandemic has kicked off at the starting of FY20, we have witnessed massive spread taking place and in response the government had imposed nation-wide lockdowns to restrict all sorts of mobility of people to curb the pandemic, barring essential services. There was a huge uncertainty about pandemic and it was unknown to all, hence 60% of economy including manufacturing and services sectors were shut down between April-May FY21.

Consequently, our economy faced first major shock induced by pandemic as it fell by -23.9% in Q1FY21. Well, how could the economy remain unharmed by the non-functioning of the major sectors that drive GDP growth and makes our economy competitive! Hence, considering all the uncertainties till date, the predictions for GDP de-growth for FY21 was -7.5% to 8%.

Chart II – The chart depicts Quarter wise performance of GDP for FY20 and FY21.

As we sailed ahead in FY21, the fall in the economic activities induced by the lockdown gave a massive blow to the consumer demand. Consumers had stopped their discretionary spending as people lost their jobs leading to a high rate of unemployment, falling incomes and the overall consumption declined drastically. The businesses ran into tight liquidity situation as they witnessed the severe supply shortages and factors of production like labour and capital started to deplete. The investments plummeted as the incomes started to fall and the domestic consumption crashed.

By the end of Q2FY21, the Covid cases started to decline. Cautiously, there was an ease in lockdowns across states while the consumption demand picked up ahead of festivals. The government backed stimulus packages, expansionary monetary policy, lower interest rates, grant of loan moratoriums and income transfers to people at the bottom of pyramid, were initiatives that kicked-in credit growth slowly in the economy. The stock markets surged fairly to higher levels from the deep plunge that the companies bore in their earnings during March-April FY 20-21.

Therefore, the economic activity revival was observed in Q2FY21 GDP by a de-growth of mere 7.4% over Q1FY21 GDP de-growth of 23.9%, Q3 GDP landed with a positive growth of 0.5% and Q4 GDP stood at a positive growth of 1.6% for FY21. See Chart II above.

Chart III

Chart III – in the Chart above, the real GDP has grown at 1.6% in Q4FY21 as against 3% in Q4FY20 and the real GDP is calculated at base price (2011-12). The GVA growth has been at 3.7% same as a year ago. Nominal GDP at Current Prices has almost stayed at 8.8% marginally higher than a year ago.

Chart IV

Chart IV – In the chart above, the blue curve depicts that Bharat’s GDP per capita stands at 99,694 for FY21 clearly declining over 1, 08,645 in FY20 but is seen comparatively above per capita in FY16. Bharat has recently lost to Bangladesh in per capita – GDP terms in FY21 which is a worrisome matter as GDP per capita declining would interpret that the economic output per person is sliding down and Bharat is losing its prosperity based on its economic growth. Red curve depicts Private consumption per capita has declined to 55,783 in FY21 against 62,056 in FY20 however seen above per capita in FY16.

Chart V

Chart V – *Private Final Consumption Expenditure (PFCE) *Government Final Consumption Expenditure (GFCE) *Gross Fixed Capital Formation (GFCF). GDP has five growth engines.

  • In the Chart above, Private consumption expenditure rate is 56% to GDP in Q4FY21 versus 57.1% in Q4FY20 indicating that there has not been any uptick in consumption demand due to pandemic in FY21. As the first wave receded, the exogenous shocks of second wave have remained even more severe and instilled a fear in consumers.
  • The Government expenditure rate stands at 11.7% to GDP in Q4FY21 versus 10.6% to GDP in Q4FY20. During the first lockdown period, the government had increased their spending through quantitative easing measures aimed for different sectors and expansionary monetary policies adopted by RBI to consistently inject liquidity in the market to circulate the money supply in the economy. Government has also been spending on Sagar mala and Bharat mala infrastructure projects that are underway especially in North East region.
  • Gross capital Formation expenditure rate is 31.2% to GDP in Q4FY21 versus 32.5% to GDP in Q4FY20. The net investment by companies has improved during FY21 despite pandemic situation. The stalled projects were resumed by companies as soon as the first wave receded post Q2FY21.
  • The exports expenditure rate is 19.9% to GDP in Q4FY21 versus 19.4% to GDP in Q4FY20. The ongoing shocks of the second wave of pandemic has continued to hurt economy for the entire FY21.
  • We observe a dip in expenditure rate to GDP for imports in Q1FY21 at 18.3%. However, we also observe a slight surge in imports in Q4FY21.
Final Expenditures on GDP FY20-21 at 2011-12 Prices (in CR)
GDP Constituents FY19 FY20 FY21 YoY FY20 YoY FY21
PFCE*           78,84,423           83,21,701        75,60,985 5.5% -9.1%
GFCE*           14,29,055           15,41,742        15,86,745 7.9% 2.9%
GFCF*           44,86,205           47,30,416        42,20,508 5.4% -10.8%
Exports           29,23,273           28,26,639        26,94,386 -3.3% -4.7%
Imports           33,43,220           33,17,165        28,65,827 -0.8% -13.6%

Table II –

  • PFCE has reduced to -9.1% YoY for FY21 vs 5.5% YoY in FY20. This de-growth indicates that expenditure on final goods and services have reduced in households out of the fear of virus. The lethal spike in mutations have restricted mobility and has led to unemployment rate in Bharat that surged to a 42 week high of 14.45% till date.
  • Government Expenditure has increased by 2.9% YoY in FY21 versus 7.9% YoY in FY20. Government in its capacity has fairly spent on health infrastructure, vaccination programmes so far, reflecting in the central government’s fiscal deficit figures at 13% of GDP (including state deficit). However, there is still room left to create healthcare in rural areas where the facilities are scarce. Upgrading medical infrastructure and training doctors and paramedical staff is the need of the hour to bring out the faster pace of vaccination programmes as the second wave lurks around and the probability of third wave looms large.
Industry Q4FY20 Q4FY21
Agriculture, Forestry & Fishing 6.8% 3.1%
Mining -0.9% -5.7%
Manufacturing -4.2% 6.9%
Electricity, Gas, Water Supply 2.6% 9.1%
Construction 0.7% 14.5%
Trade, Hotels, Transport, Communication 5.7% -2.3%
Financial, Real Estate 4.9% 5.4%
Public Admin, Defence 9.6% 2.3%

Table III The table showcases the economic activity in Bharat economy that pushes the GDP growth higher. The performance of our key sectors can be observed through the table. Construction sector has posed the highest growth of 14.5% followed by manufacturing by 6.9%, financial sector by 5.4% and agriculture by 3.1% in Q4FY21 vs Q4FY20.

Conclusion

As the positivity rate of virus in Bharat has dropped below 7% and we observe that the second wave of pandemic might be receding but there is a high probability that the third wave might be round the corner with severe mutations. Countries across the globe have their economies coming back on track with higher consumption demand and the Covid cases continuing its southward trajectory.

The risk of the pandemic after second wave has instilled fear in vast tracts of Bharat. It has brought certain sectors to their knees like auto, MSME’s, etc., surging unemployment levels, and sluggish credit growth. The rural economy is ailing at the moment with pandemic poses downside risks but rural demand is expected to remain strong as normal monsoon is expected this year.

RBI has been buying bonds to keep bond yields low, has maintained its accommodative policy stance and making every bit of it to keep the economy going at sustainable levels with sufficient liquidity to uplift the consumer sentiment as much as possible. There is a GDP forecast of 9%-10% for FY22 by RBI as the demand recovers and economic activity ramps up thereby rebounding the economy.

The only solution would be to pick up pace of the vaccination drive to cover as much population as possible so that people feel safe to go out. Government must continue spending in infrastructure for employment generation, and people must be cautious and continue with their Covid- appropriate behaviour. The mobility should be restricted even as the states ease their lockdowns gradually.

Sources – MosPI, NSO


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Criti Mahajan
An MBA graduate in finance with 5 years of working experience in the financial services space. An enthusiastic research writer inclined towards understanding economics and policy making with an experience of diversified writing on professional platforms in economics. A self-starter, perseverant and an ardent learner.

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