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  • Writer's picturePooja Ambala

Indian Economy Before Covid

Updated: May 12, 2022

In the pre-COVID era, India was grappling with major macroeconomic issues such as near-recession, with a sluggish GDP growth rate of 4.7 percent in 2019, the lowest since 2013 (according to official statistics), high unemployment, the worst decline in core sector industrial output in 14 years, stagnancy in private sector investment, and the first decline in consumption expenditure in decades (Dev & Sengupta, 2020). Also, due to demonetization in 2016 and GST in 2017, India's informal sector, which employs nearly 90% of the working population and contributes significantly to overall GDP (more than 45 percent), has already been hit by two significant shocks (or reforms).

In India, the financial sector, which plays the most critical role in times of crisis, has been beset by issues such as the Twin Balance Sheet (TBS), high levels of non-performing assets (NPAs), and an undercapitalized banking system. Firms are also financially weak and overleveraged in the private sector (Sengupta & Vardhan, 2019). Other issues include the IL&FS crisis, a 90 percent drop in commercial credit in FY2020(Q1), and so on. 6 and 7 With the emergence of such a deadly disease, India faces a new set of challenges in the short and long term. Despite the macroeconomic uncertainty, the situation necessitates major policy interventions in healthcare infrastructure, livelihood, vulnerable sections, and various humanitarian issues. The solution proposed by (Chakraborty & Thomas, 2020) as an innovative method for financing deficits is a variant of helicopter money—"money financing of the fiscal program."

India's economy grew faster in the January-March quarter than in the previous three months. Still, economists are more pessimistic about this quarter after the country was hit by a second wave of COVID-19.

According to the median forecast of 29 economists polled by Reuters, Asia's third-largest economy grew 1.0 percent year on year in the March quarter, up from 0.4 percent the previous quarter, when India emerged from a deep pandemic-induced recession in the last six months.

However, the second wave of infections and deaths in the world's second-most-affected country has prompted forecasters to lower their expectations for the coming months.

After the resurgence prompted most industrial states to impose lockdowns, putting millions out of work, the median forecast for April-June growth is 21.6 percent, down from a month-earlier estimate of 23 percent. Economists reduced their median estimates for the fiscal year to March 2022 from 10.4 percent to 9.8 percent.

The economy, which was already slowing before the pandemic, is now facing a collapse in consumer demand, accounting for over 55% of the economy, as household incomes and jobs have fallen.

According to the Centre for Monitoring Indian Economy, a Mumbai-based private think tank, unemployment rose to a near one-year high of 14.73 percent in the week ending May 23.

Due to a drop in tax collections and rising public debt, Finance Minister Nirmala Sitharaman said that no decision had been made on a new stimulus package.

Before the outbreak of the COVID-19 pandemic, India's economy had started to slow down after years of rapid growth. Between FY17 and FY20, growth slowed from 8.3 percent to 4.0 percent, owing to financial sector weaknesses compounded by a drop in private consumption growth. The economy shrank by 7.3 percent in FY21.

In response to the COVID-19 shock, the government and the Reserve Bank of India implemented several monetary and fiscal policy measures to help vulnerable firms and households, expand service delivery (including increased spending on health and social protection), and mitigate the economic impact of the crisis. Due to these proactive measures, the economy is expected to rebound with a strong base effect materializing in FY22 and growth stabilizing at around 7% after that.

Even before the coronavirus outbreak, India's economy was in the worst shape it had ever been, with GDP growth in 2019-2020 falling to an 11-year low of 4.2 percent. The economy grew by 3.1 percent in the first quarter of 2019-2020, compared to 5.7 percent a year ago, the slowest rate in at least eight years.

According to the National Statistical Office data, the manufacturing sector grew by only 0.03 percent in F.Y. 2019-20, compared to 5.7 percent the previous year. The construction sector's growth, which has a spill over effect on several other industries, has slowed to 1.3 percent.

In F.Y. 2019-20, gross capital formation remained low, while bank deposit growth fell to 7.9% from 10% the previous fiscal year, indicating low savings. Bank credit growth has more than halved to 6.1 percent, compared to 13.3 percent in the last fiscal year, meaning that people's consumption will be lower as well.

The information comes as the country prepares to enter Lockdown 5.0, with a few exceptions, to combat the spread of coronavirus infections. Many businesses, reeling from the worst slowdown in history, shut down operations, resulting in thousands of job losses.

"Real GDP growth had fallen to 4.2 percent in 2019-20, the lowest since 2008-09, when it was 3.1 percent, due to a 2.8 percent contraction in investment and a 3.6 percent drop in exports." "On the output side, there has been a drop primarily in manufacturing and construction, as well as the two heavyweight service sectors — trade, hotels, and other hospitality services, and financial and real estate services," said D.K. Srivastava, EY India's chief policy adviser.

"As a result, India is confronted with a problem of falling investment and savings, as well as an acute problem of Covid-induced lockdown." Gross capital formation as a percentage of GDP dropped to 29.7% in 2019-20 at current prices. In 2019-20, the saving rate was expected to be 28.7%, implying a savings rate of 28.7%. At the same time, due to sharply declining tax revenues from the central government, the country's fiscal capacity to meet these challenges is weakened. "The growth outcome in 2020-21 will be determined by the balance between agriculture's positive contribution and public administration and defence services' subdued performance, as well as the performance of manufacturing, construction, and the two heavyweight service sectors," he explained.

Weather forecasts for normal monsoon rains give hope to millions of migrant workers who returned to their villages from the cities when the lockdown began.

P. Chidambaram, a Congress member, lashed out at the BJP government, predicting that Q4 GDP growth would fall to a new low of below 4%. "It turned out to be even worse, with 3.1 percent. This is before the lockdown. Only seven days out of 91 in Q4 were subjected to the lockdown. Mr. Chidambaram said, "It's a telling commentary on the BJP's economic management."

Even before the Covid-19 pandemic, India's economy steadily deteriorated during the current regime, according to some of the most critical variables in the data.

So, how has the Indian economy fared during the current government's seven years in power?

Examining the so-called "fundamentals of the economy" may be the best way to arrive at such a conclusion. This term refers to a collection of economy-wide variables that provide the most reliable indicator of an economy's health. That is why you often hear politicians reassuring the public that the "fundamentals of the economy are sound" during times of economic turmoil.

The GDP growth rate has been a source of growing weakness for the last 5 of these seven years, contrary to the Union government's assertion.

Two things stand out. The Indian economy began to recover in March 2013 — more than a year before the current government took office — after a period of decline following the Global Financial Crisis.

But, more importantly, since the third quarter of 2016-17 (October to December), this recovery has turned into a secular deceleration of growth. While the RBI does not state it, many experts believe the government's decision to demonetize 86 percent of India's currency overnight on November 8, 2016, was the catalyst that sent the country's growth into a tailspin.

The GDP growth rate steadily fell from over 8% in FY17 to around 4% in FY20, just before Covid-19 hit the country, as the ripples of demonetization and a poorly designed and hastily implemented Goods and Services Tax (GST) spread through an economy already struggling with massive bad loans in the banking system.

PM Modi expressed optimism in January 2020, when GDP growth fell to a 42-year low (in terms of nominal GDP), saying, "The strong absorbent capacity of the Indian economy shows the strength of the Indian economy's fundamentals and its capacity to bounce back."

In conclusion, The fundamentals of the Indian economy were already weak in January last year — well before the pandemic.

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