GDP data’s message: Government needs to do more–Times of India

Clipped from: https://timesofindia.indiatimes.com

The gross domestic product numbers for both the fourth quarter of 2019-20 and also the full financial year, which were released on 29th May, signalled the economic situation is grim.

The fourth quarter’s GDP grew 3.1% over the corresponding period of the previous year, making it the lowest quarterly growth rate on record in the 2011-12 GDP series. Similarly the full year’s growth rate of 4.2% is also the lowest on record in this series.

Both these numbers are likely to be revised soon as data collected was hampered by the lockdown imposed in the last week of March. 

The salient feature of the numbers is the trend in the quarterly numbers has shown a visible deceleration in growth over eight successive quarters. The full year numbers have shown a marked slowdown in growth over three years. The growth rate has almost halved since 2016-17.

Given the loss of momentum for three years prior to the lockdown, the duration of the ongoing lockdown suggests that a ‘V’ shaped recovery in the latter half of the financial year forecast by the finance ministry may be unlikely.

The pre-existing drag in the economy may partially offset the main pillar of the government’s stimulus package, that is, financial intermediaries led by banks will utilise the potential liquidity to revive the economy from the supply side.

Instead, the weak economic condition may make financial intermediaries particularly risk averse. Consequently, the main assumption underlying the stimulus package may turn out to be misplaced.

The GDP data clearly brings out the anaemic state of the economy. Manufacturing in fiscal 2020 was almost stagnant and fixed investment shrunk by 2.8%. 

Finance minister Nirmala Sitharaman has indicated that the government is willing to consider more stimulus measures if necessary. The GDP data indicates that the government needs to do more. The best possible way is to check the squeeze on aggregate demand through a higher quantum of direct cash transfers to India’s most vulnerable citizens.

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