By Ashwin Malik Meshram

    It was a moment that pricked everyone’s ears. In August of 2020, finance minister Nirmala Sitharaman stated that the Indian economy is in shambles because it’s facing an extraordinary ‘Act of God’ in the form of the COVID-19 pandemic, rendering its growth to contract by around 24%, believed to the worst slump India encountered, since it began releasing its quarterly data 25 years ago. It wasn’t received well, especially since India’s growth was at an all-time low, facing one of its worst recessions since Independence, when a good chunk of businesses had been drastically impacted due to the shutdown, more than 140 million citizens were laid off and salaries and revenues were decimated, with the IMF stating that India would register a negative growth rate of around 4.5% and India becoming the worst performing economy in Q2 of 2020 among the G20 nations.

    Yet, even pre-pandemic, the economic slowdown that India was facing was already at an all-time high. Our GDP growth rate almost persistently fell for 8 quarters and was around 7.3% by March 2018, around 5.8% by March 2019 and around 3.1% by March 2020, which meant that there was already a growing crisis leading up to the pandemic, but the pandemic itself was purported to be the scapegoat justification used to explain the deleterious nature of the slowdown we were facing, much worse than the troubles we were facing in the period of 2011-2012, when our GDP growth rate was around 9.2% by March 2010 and around 5.3% by March 2011, after which we slowly recovered. Usually, how much we consume underpins the country’s economic growth.

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    One metric used is the private final consumption expenditure, which refers to the expenditure incurred by households and non-profit organizations that serve households, such as political parties, religious institutions and trade unions in an economy. Our real private final consumption expenditure (PFCE) was at around 4.4% in 2019-2020 and was expected to improve to around 6.4% during 2020-2021, yet fell to around 2.7% in March of 2020. There was even a major fall in the degree of investment being undertaken. The fall in investment and the rise in governmental spending also predated the pandemic, with government spending rising by around 12% and a fiscal deficit nearly 5% higher than the previous regime.

    Another metric used is the Gross Fixed Capital Formation (GFCF), which is sometimes a posh way of saying “investment” and refers to the gross acquisition of fixed assets, as well as any potential changes in stock, such as an increase in the stock of these fixed assets. Our Gross Fixed Capital Formation (GFCF) was around 58.51 lakh crore rupees in 2019-2020, but had a major decline quarter after quarter and according to an RBI report, was expected to fall by around 9.8%, which again, hindered any semblance of stable economic growth India could potentially have. Our nominal GDP growth rate was around 11.2% in FY 2018-2019, but fell to around 7.5% for 2019-2020, which then fell to around 5.2% by December 2020.

    But, way before that, when India started to recover from the Global Financial Crisis of 2008, years on, it seemed like the demonetization of 86.4% of the banknotes of Indian currency in the market undid that recovery and kickstarted India’s spiralling downfall in our economic growth. Economic activity was declining by around 2.2% by the end of 2016 and a report by CMIE (Centre for Monitoring the Indian Economy) stated that around 1.5 million jobs were gone in roughly the first half of 2017. Furthermore, a dearth in capital and scores of jobs lost meant that the unorganized sector was being further compromised. Even Abhijit Banerjee, Nobel-prize winning economist, co-author of “Poor Economics” and “Good Economics For Hard Times”, believed that the pain of demonetization would be far greater than what was initially expected, because of the potential cost of a major liquidity crunch, wherein the number of economic transactions would dip over time, due to the fall in spendable cash. Moreover, this disproportionately hurt the informal sector, including agriculture, where more than 85% of the Indian workforce, who primarily transact in cash, as opposed to other modes of payment, since the digitization of cash still has a long way to go in India. This meant that the supply-chain was bleeding and hurting small businesses as well. Former Finance Minister P Chidambaram opined that India paid an exorbitant price for demonetization with a fall in GDP and a fall in jobs. The fall in supply of money meant an aggregate demand shock and the restriction of availability of money for economic transactions indicated an aggregate supply shock. An IMF report stated that cash shortages led to a disconnect between a consumer and a business, further hampering production and consumption. In fact, former RBI Governor Raghuram Rajan believed that the demonetization severely impacted India’s growth, especially at a time when contemporary economies and other countries worldwide seemed to have their economic growth ameliorated.

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    Unemployment was also a major major issue that India has long been struggling with, but seemed to be an emphatic issue pre-pandemic, with its rate being 6.1% in FY18, which was at a 45-year high, with the unemployment rate for females, both urban and rural, at 5.7% and for males, both urban and rural, at 6.7% and keeping steady at around that rate for the coming years pre-pandemic.

    We would be led to believe that the COVID-19 pandemic was an outlier event, as many behavioural economists would call it, yet, it can be posited that, as opposed to an outlier event, based on all the information aforementioned, it is a pattern that collapsed the camel via the straw on its back and choked economic reforms; steadily worsening in the course of this regime even before COVID-19 destroyed our sense of normalcy and the little stability we treasured. It can be said the pandemic wasn’t a key reason for the contraction, but one aspect of it. That being said, the pandemic has magnified and exacerbated pre-existing risks to India’s economic health, even while being used as a mask, ironically, to cover the face of problems experienced by the Indian economy.

    So even when the country recovers from the pandemic and its aftermath, the fundamental issues in the economy will continue to exist and drag the economic growth downwards. And unless our government acknowledges these fundamental issues and starts taking concrete steps to mitigate these problems, it paints a pretty grim outlook for Indian economy in the near term.