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Tata Capital > Blog > The GDP Print has come worse than expected. The Effect of Q1 GDP contraction will be felt for years to come. Explained

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The GDP Print has come worse than expected. The Effect of Q1 GDP contraction will be felt for years to come. Explained

The GDP Print has come worse than expected. The Effect of Q1 GDP contraction will be felt for years to come. Explained

The Covid-19 pandemic not only continues to claim the lives and livelihood of millions but has also deferred India’s target of becoming a 5 trillion dollar economy. Although the target was already beginning to seem distant since the economy was gripped by a massive economic slowdown even before March, the rising Covid-19 caseload means that that the target is least of India’s problem right now.

The GDP contracted by a massive 23.9 per cent in the April to June quarter (YoY). This came in as a shocker since most polls expected the number to be 18 per cent. The alarming decline was a result of the Covid-19 outbreak which necessitated a nationwide lockdown resulting in massive job loss and decline in economic activity.

In order to truly understand the implications of the worst contraction in over 40 years let’s look at how the former RBI governor Raghuram Rajan reacted to the data points. His comments assume significance since he points at the issue that will continue to act as an impediment in India’s growth. Rajan warned that in the absence of relief measures, households may skip meals and pull children out of schools.

A break in education for low-income groups could mean that children may be forced to work at a young age or beg. He further said that households may be forced to pledge their gold to borrow, and let EMIs [equated monthly instalment] and rent arrears pile up. Rajan further threw light at small and medium firms such as small restaurants who may stop paying workers, let debt pile up, or close permanently in absence of relief.

Strained government finances

The massive decline of economic activity owing to the lockdown will adversely impact tax revenues of both the Centre and the states. The Reserve Bank of India in its annual report noted that the fiscal space for the Union government to continue to support demand in the economy may be “severely diminished” given the impact of Covid-19 on government finances.

In what could continue to adversely impact economic activity in the country, the central bank warned of potential output losses once the unwinding of the stimulus measures and regulatory easing starts after the pandemic. Besides reducing the debt and deficit levels in the aftermath of the pandemic would also be a challenge for the government.

Indian GST collection

(Source: HT Mint)

Indian GST collection also suffered significantly. The drop in GST revenue had resulted in heated discussions between the central and state governments. States have claimed that the center had assured them of compensation for tax collection till 2020 but the center had invoked ‘act of God’ for not paying the dues directly. Although the matter was resolved, flaws in the GST regime came out in the open.

Additional Read: Effect of Bank Failure on the Economy

Unorganized sector

In less than 5 years, the unorganized sector has witnessed another jolt. Demonetization had already caused severe loss of livelihood which was reflected in the massive fall in consumption, which was partly responsible for the economic slowdown that followed. The unorganized sector, other than agriculture, was hit the hardest by the Covid-19 induced lockdown.

With little working capital at their disposal, the units in his sector will be forced to dip into their savings in order to survive. Besides owing to the lack of working capital the sector will find it tougher to revive even after the lockdown. The impact of which will continue to show in the future.

Loan moratorium quagmire

Amid growing calls to waive-off interest during the period of lockdown, the government has set up an expert panel to assess the impact of interest waiver on moratorium loans. Besides the fundamental question — how will banks pay depositors’ interest if they don’t charge interest from borrowers, the RBI has estimated the likely impact of interest waiver on the banking sector to be around Rs 2 lakh crore.

According to another research, if interest-on-interest during the moratorium period is waived off, the impact on the banking system could be about Rs 15,000-20,000 crore. Therefore the banking system may be forced to bear the consequences of the lockdown which may act as a growth impediment in the future.

Additional Read: Loan moratorium can be extended by 2 years: Govt

Conclusion:

The first sign of the impact of lockdown on the economy was only visible in the Q1 numbers. The economy is yet to be fully reopened and with the rising caseload, the decision to unlock economic activity shall be all the more difficult. Experts are of the view that the GDP figures during the current fiscal year may remain in the negative territory. During these uncertain times, you may want to rely on professional wealth managers. Tata Capital offers an unmatched bouquet of well-researched wealth management products for each asset class. Tata Capital’s endeavor is to ensure that customers get the right solutions best suited for their investment goals.

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