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Home / Economy / Even with 20.1% GDP growth, the economy has been set back by three years

The gross domestic product (GDP) growth for the period April to June 2021 came in at a record 20.1%. GDP is the measure of the economic size of a country during a particular period.

This is the highest growth that India has seen since the country started reporting quarterly GDP data for the quarter ended June 1996.

Base effect 
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Base effect 

Nevertheless, before the champagne bottles are opened, and congratulatory WhatsApp forwards are sent out, the 20.1% GDP growth is nothing but a mathematical quirk. As can be seen from the accompanying chart, the June quarter growth comes on the back of an economic contraction of 24.4% in the year earlier.

This massive contraction happened because the government decided to lock down the country for much of April and May 2020 to prevent the spread of the Covid pandemic. With people and goods not moving around and services being more or less shut, the economic activity took a huge beating. Supply chains broke down. Many manufacturing units and offices were shut. So were malls and shops selling general merchandise. Only shops selling essentials could open for a few hours every day. All this resulted in the economy contracting by almost a quarter.

The massive contraction last year makes the growth this year look exceptionally good. Economists call this the base effect.

In fact, a better way to judge economic data from April to June this year would be to compare it with similar data for April to June 2019 to get around the negative economic impact of covid, which will make every economic impact data point look exceptionally good.

The GDP for the period April to June 2019 stood at 35.67 trillion. The GDP for April to June this year was at 32.38 trillion or 9.2% lower than two years ago. A simple way of looking at it is that something started at 100, fell to 76 (24% contraction) and is now at 91 (20% growth over 76). Net-net, it’s still 9% lower than where it was.

Interestingly, the GDP for the June quarter is even lower than the quarter ended June 2018, when it was at 33.84 trillion. So in that sense, the GDP for April to June is lower than it was three years back. And that is the correct way of looking at things. The negative impact of covid and the economic slowdown before that has set back the economy by more than three years.

Interestingly, the GDP growth for the June quarter this year was expected to be more than 30%. A 32.32% GDP growth would have ensured that the GDP for the period would have been similar to the GDP for April to June 2019. Nonetheless, the deadly second wave of covid, which peaked in mid to late May, hurt economic activity. The repercussions are still being felt.

The chances are that the GDP for the September quarter will turn out to be more or less around where it was in the year-ago period. Indeed, that would mean a GDP growth of around 8% and is something to look forward to.

Of course, the GDP growth for the remaining part of the year will be lower and most likely in single digits, as the impact of the base effect wears off.

Vivek Kaul is the author of Bad Money.

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