Tata Capital > Blog > Wealth Services > 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.
(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.
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.
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.
09 October 2020
5 mins read
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