Covid-19 has struck the entire global economy and has not left India too. As in when India was starting to get back to its normal pace in a calibrated way, it got this disappointing result of economy contraction going down to 23.9% (by National Statistics Office) decline which is the worst, Indian economy have ever witnessed. This result came back for the months of April-May-June Quarter which to be honest was expected to decline as everything was at a standstill this quarter. But it was not expected this huge. It is also the worst among the major Asian economies. India have therefore marked the deepest recession ever and is likely to continue for the second quarter as well. As the Covid cases surge rapidly which will surely affect demand weighs which will ultimately affect the spending abilities of the economy.
Covid-19 had a huge hit on our Indian merchants, businesses, vendors, and all the other businessmen who had to face a complete shut down for approximately 2 months straight. Even the change in consumer behaviors after this was significant and the economy sought it difficult to match up with the same.
Before the pandemic, India had a 3.1% GDP growth for the 1stquarter in 2020 and a 5.2% GDP Growth in quarter ended June 30, 2019. No one would have expected then that we would see this day so soon.
The official figures were estimated around this percentage by various agencies, all of which were estimating this contraction to be around 15% – 30%. It is also quoted by various agencies then this estimation of 23.9% contraction by NSO might be lower than estimated. As NSO would be using corporate data for analyzing and might use this data as a proxy for the informal sector. So, it might be showing a lower contraction estimate close to 2%-3% less. The actual figures may be much worse.
SECTORS HIT MAJORLY
The GVA (Gross value Added) as per the NSO declined by 22.7%, where Manufacturing and production units was the major contributors to this decline. Manufacturing declined by a whopping 39.3%, Construction activities declined by a huge 50.3%, Mining by 23.3% and electricity by 7%. The Gross Fixed Capital Formation (GFCF) contracted by a mammoth 52.3%. Finance activities which form a major share of the GDP was not that bad hit comparatively to other primary and production sectors, having the economy to hold a bit. The Finance sector of the economy declined by 5.3% in the April-June quarter.
Though, the major bright spot was the Agriculture sector as it was the only sector functioning during the lockdown. Also, there were various important reforms released and implemented by the Agriculture department which gave positive sentiments for the agriculture sector’s future prospects. The monsoon this year also supported the yield of the farmers which also resulted into higher productivity. Agriculture sector grew up by 3.4% this quarter.
The stimulus package might not show its affects in the near term.
Struck by a huge economic breakdown, Modi government knew that the economy would be hit majorly and they would need a severe injection of funds in the economy to give some or the other fuel to keep the economy charged. Following which the Modi Government launched a stimulus package of 20 lakh crores, nearly almost 10% of the GDP, aiming to have credit infusion in the economy. This package included various relief funds on loans for sectors hit the most including production and manufacturing, mining, electricity, automobile and finance as well. This package also had the vision of building credit guarantees on the bank loans which were on moratorium and also providing funds and supplies for the poor.
Though many economists and professionals quote that this stimulus was already in the Government’s budget and its affect won’t be seen anytime soon. As all the fund infusions are directly proportional to economy’s spending and income generation, it would take time for the fund to be rotated. Also, the manufacturing and production sector might take time to capitalize on this package as the supply would be lowered massively to match up with the contracted, demand which will ultimately have less income generation.
Efforts by the Reserve Bank of India
The Reserve Bank have been constantly lowering down its Bank rates and Repo rates, in order to provide a good support for the bank and the ultimate borrowers. It has lowered down around 115 basis points since March to help economy revive through financial sectors. Instead of inflation, RBI’s real focus now has been to focus on the revival and health of the overall economy. We might see more declines in the rates by RBI for the coming future.
Foreign Exchange condition better
India has seen an impressive surge in its Foreign Exchange reserve as it crossed the $500 billion dollar mark this July. As India was a major player when it came to exports of Hydroxychloroquine and also became the top exporter of PPE kits which made Indian exports to increase. Also, the trade deficit is lowered as imports are also hit majorly.
As we move forward, we might see a similar result for the second half of 2020 as well. As cases surging and consumer behaviors changing, demands would be largely hit which would ultimately increase savings and less income generation in the economy. Not just India but many other economic giants like UK economy declined by 22.3%, USA by 32.9% and Germany by 10.10% even after having small lockdowns in their countries. Though China managed a 3.2% growth in the economy but it was still contracted when compared to a 14.33% increase in the previous year.
This quarter end result also showed its impacts on the stock market today as Sensex crashed 839 points down which started at 500 points up in the market opening. Also, the India-China tensions arising may have a negative impact on the coming trading days. Let’s see how it shapes up, but for now, it clearly seems that our economy has hit by a major storm and it would take time for us to get back again to that normal growth speed of the GDP rate we had.