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GDP review hints at continued  pain in store for India

India’s gross domestic product (GDP) contracted by 23.9% in April-June 2020 from the year-ago period. After this figure was published, there has been a spate of downward revisions for likely contraction in India’s GDP in 2020-21. What is happening here? Mint takes a look

India’s gross domestic product (GDP) contracted by 23.9% in April-June 2020 from the year-ago period. After this figure was published, there has been a spate of downward revisions for likely contraction in India’s GDP in 2020-21. What is happening here? Mint takes a look.

What’s the logic behind downward revisions?

Economists like to move in herds. After one of them cut India’s GDP contraction forecast for 2020-21, it wasn’t surprising that others too followed suit over the last two weeks. The major reason being offered for the downward revision is the continued spread of the coronavirus pandemic. This was obvious even before the GDP figures for April-June were published. However, economists were waiting to see how bad the actual figures would be before making any comment. When the actual figures turned out to be worse than anticipated, the downward revisions started to come out one by one.

What else is behind the GDP forecast review?

The spread of covid will continue to cause disruption. As Fitch Ratings said while revising India’s GDP contraction to 10.5% from 5% earlier: “The continued spread of the virus and the imposition of shutdowns across the country… disrupt economic activity." Besides, the pandemic remains concentrated in states that have a larger share in India’s GDP. As the rating agency Crisil said while revising India’s contraction to 9% from 5% earlier: “Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh together account for ~54% of India’s cases as on September 7, and ~36% of India’s GDP." These factors have prompted revisions.

Herd behaviour
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Herd behaviour

Are the downward revisions a result of structural flaws?

The pandemic is spreading more rapidly in semi-urban and rural India, where medical infrastructure remains weak. Crisil says: “The pandemic is now rapidly spreading from metropolitan to smaller cities and rural areas. Of all the districts with 1,000+ cases, almost half were rural as on August 31, up from 20% in June." Thus, poor infrastructure is a reason too.

Which sectors will hold the economy back?

The construction sector, which constitutes a little more than 7% of the economy, will be badly hit this year due to the outbreak and shutdown. As CARE Ratings said while revising India’s contraction to 8-8.2% from the earlier 6.4%: “Construction activity is expected to contract by 24% for the year as private sector participation would be limited. The housing sector would be under pressure with a build-up of inventory and there would be limited traction. The same holds for commercial space." The sector is a huge job creator.

How will inflation impact the economy?

The food inflation between April and August this year has been at a very high 9.6%. This, in an environment where incomes have come down. Hence, high food inflation has hit spending. Besides, as covid spreads through rural India, the supply chain disruptions on the food front may continue, which means that chances of food inflation continuing to remain elevated are on the higher side. In such a case, people will be doubly careful about spending money.

Vivek Kaul is the author of Bad Money.

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