Sept 8, 2020

Effects of GDP on the Current Economy

The world is changing with the increased rise of the pandemic. Every change comes up with its own disadvantages. Recently, the entire nation was at awe after witnessing a staggering 23.9% drop in the GDP counted for the last quarter. This surely arises a lot of questions as to why did this particularly happen in this quarter and what is the aftermath of this situation?

COVID situations mandatorily play a huge roll in this drop. To understand the reason for this steep downward slope we first need to analyse what GDP is how it is estimated.

Gross Domestic Product is the total demand for goods and services produced in a country. GDP as an economic indicator is used worldwide to show the economic health of a country. The GDP growth rate of any nation acts as an essential indicator of the country’s economic development.

In any economy, the GDP is generated from one of the four engines of growth.

The biggest engine is consumption demand from private individuals like us. This accounted for 56.4% of all GDP before this quarter. The second engine is the demand generated by private sector businesses. This has accounted for 32% of all GDP in India. The third engine is the demand for goods and services generated by the government. It accounted for 11% of India’s GDP. The final engine is the net demand for GDP after we subtract imports from India’s exports. In India, this is the smallest engine and, since India typically imports more than it exports, its effect is negative on the GDP. So, the total GDP is calculated by adding all these 4 engines taking all the averages into consideration.

Private consumption which is the biggest engine driving the Indian economy has fallen by Rs.5,31,803 or 27% over the same quarter last year. The second-biggest engine, investments by businesses has fallen by Rs.5,33,003 which is half of what it was last year the same quarter.

So, the two biggest engines, which accounted for over 88% of Indian total GDP has seen a massive contraction.

Even before the COVID crisis, government finances were extended. It had borrowed money more than it should have which caused the major problem. As a result, today it doesn’t have sufficient funds to find solutions to the financial crisis. It will have to think of some innovative solutions to generate resources.

The June quarter GDP number came in worse than most estimates at -23.9% YoY. Widespread and repeated lockdowns have resulted in this sharp fall. Construction contracting 50.3 percent and Trade, hotel, transport, communication contracting 47 percent are the two negative surprises. Investments too contracted 47.1 percent. The numbers show a negative effect of the many industries in the Indian market. The ball would now be in the court of the government to spur consumption by taking fiscal measures.

Now the focus will shift to the September quarter. Going by the July core infra number of -9.6%, the September quarter may also record a high single-digit decline in GDP on a YOY basis. While the rural economy has offset the slowdown in urban areas in Q1 to some extent, it is difficult for rural recovery in subsequent quarters. Another reason for this is that Covid-19 has started to penetrate rural areas at a fast pace since July.

The only solution to this problem is to increase the exports from our country, in other words, create various industries in our motherland. Following the simple steps of our Prime Minister towards an ‘Aatmanirbhar Bharat’ is one solution to these measures. Essentially, this is to spur growth and to build a self-reliant nation. The more prominent the citizens are towards these new policies and innovations; the better results will rise for our country!

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