The complete 68-day lockdown and gradual unlock-1, 2, 3 and 4 of the economy of India is showing its effects now. The GDP growth in Q1 FY21 contracted by a massive 23.9 per cent. This means the fiscal support and monetary stimulus did not work significantly. The GDP fell to ₹26.9 lakh crore in constant terms and ₹38.08 lakh crore in nominal terms. Former chief statistician Pronab Sen says the actual shrink of GDP is 35 per cent.

This is the first GDP contraction of India in more than 40 years and the steepest shrink in G20 countries. Everyone was expecting the GDP to shrink 5-10 per cent even though the SBI had expected a 16.5 per cent fall, and the NCAER, 26 per cent. The full-year GDP could perform worse as the Covid cases are yet to peak. A rough estimate would be a decline of 7 per cent for FY21. The RBI is now silent on the GDP projection. The chairman of the 15th Finance Commission said the GDP growth will be -6 per cent to 1 per cent. Goldman Sachs predicts a 5-per cent shrink; Crisil estimates a 9-per cent fall; Fitch is expecting a 10.5-per cent shrink; and Moody’s pegs it at -11.5 per cent for full-year GDP in FY21. All estimates are the highest fall since the 1950s.

Covid-19 has impacted global growth too. The WTO notesworld trade will fall between 13-32 per cent in 2020. UNCTAD is expecting a 27-per cent decline in the value of international trade in goods in Q2 2020. IMF projects a 4.2-per cent fall in global growth. The World Bank and OECD are estimating that the global fall will be 5.2 per cent and 6.0 per cent, respectively.

What needs to be done?

Data reveal that construction sector took the steepest hit, a 50.3-per cent shrink, followed by trade, hotels and transport — 47 per cent; manufacturing, 39.3 per cent, and mining at 23.8 per cent. These sectors create maximum new jobs in the country. The contraction in these sectors would raise unemployment. The agriculture sector grew by 3.4 per cent in terms of gross value added. But a matter of concern is also there. An SBI study shows the share of rural loss in the overall GDP of eight States is significantly large as compared to the urban sector. Most of these States produce cereals, pulses and edible oils.

The GDP numbers must motivate sober introspection and political action to revive the economy. The fundamentals of the economy are worsening. Industrial production fell by 10.4 per cent in July. Recently, the RBI received only ₹1,000 crore worth of bids for its 56-day term repo auctions against the ₹50,000 crore offered. The fiscal deficit of the centre for April-June touched 83.2 per cent.

Revenues are also declining. The total net direct tax collections dipped 26.3 per cent at ₹1.89 trillion against ₹2.56 trillion a year ago. GST revenue collection is also declining. Neither the budgeted target of disinvestment of ₹2.10 lakh crore nor the GST revenues of ₹6.90 lakh crore for FY21 is looking to be achieved. The average collection of GST for the first four months for FY21 is only ₹68,165 crore, against an unofficial monthly target of ₹100,000 crore. The disinvestment proceeds up to May 2020 is only 7.95 per cent at ₹16,687 crore.

India is facing the worst economic crisis since 1991 and fourth since Independence. The unemployment rate in August was at 8.3 per cent — 9.8 per cent in urban areas and 7.6 per cent in rural areas. According to McKinsey, an 8 per cent GDP growth is required to create 90 million non-farm jobs in the next 10 years. The retail inflation rate reached 6.93 per cent in July 2020 due to higher food prices. Data show that many businesses have shut down due to the complete halt in economic activity during the lockdown. The inflation in food prices at the same time surged to 9.62 per cent.

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The present fall was well-expected but the economy was falling even much before Covid-19 pandemic. The GDP growth rate for Q4 FY20 was 3.1 per cent and for the full year, it reached 4.2 per cent — the lowest in the decade. To bring the economy back to pre-Covid GDP levels, the government will have to increase its spending.

The government needs to take corrective measures. It must work to restore confidence among bankers, businesses, and international organisations. A robust fiscal plan to revive the economy must be introduced. Former PM Manmohan Singh has already suggested means to revive the economy. It is the time to resolve the problems of fear, uncertainty and insecurity felt by people, businesses and institutions.

Both fiscal and monetary support is needed to push economic recovery. The government has to redirect its policies to create demand in the market. The direct fiscal support should be increased. The finance minister had already announced a ₹20-lakh crore stimulus package. But new spending was not more than 2 per cent of GDP. The government must wake-up and act swiftly to save the economy.

The writer teaches at ITS Ghaziabad. He is the co-author of Indirect Tax Reform in India: 1947 to GST and Beyond

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