From UPSC perspective, the following things are important :
Prelims level : Various economic indicators mentioned
Mains level : India's economic growth
India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21.
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There are two ways to view this contraction:
- One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.
- The other way would be to look at this contraction in the context of what has been happening to the Indian economy since the regime change.
Impact of the new regime
Let’s look at the most important ones.
(1) Gross Domestic Product
- Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.
- The GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.
- The economy was already struggling with massive bad loans which were further deteriorated by demonetization and the GST regime.
(2) GDP per capita
- Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy.
- At a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started.
- As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.
(3) Unemployment rate
- This is the metric on which India has possibly performed the worst.
- First came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetization and GST.
- Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of total employment declining in independent India’s history.
- As against the norm of an unemployment rate of 2%-3%, India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19.
- The pandemic, of course, made matters considerably worse.
- What makes India’s unemployment even more worrisome is the fact that this is happening even when the labor force participation rate — which maps the proportion of people who even look for a job — has been falling.
(4) Inflation rate
- After staying close to the $110-a-barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $85 in 2015 and further to below (or around) $50 in 2017 and 2018.
- On the one hand, the sudden and sharp fall in oil prices allowed the government to completely tame the high retail inflation in the country, while on the other, it allowed the government to collect additional taxes on fuel.
- But since the last quarter of 2019, India has been facing persistently high retail inflation.
- Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge.
(5) Fiscal deficit
- The fiscal deficit is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.
- Typically, there are two downsides of excessive borrowing:
- One, government borrowings reduce the investible funds available for the private businesses to borrow (this is called “crowding out the private sector”); this also drives up the price (that is, the interest rate) for such loans.
- Two, additional borrowings increase the overall debt that the government has to repay. Higher debt levels imply a higher proportion of government taxes going to pay back past loans. For the same reason, higher levels of debt also imply a higher level of taxes.
On paper, India’s fiscal deficit levels were just a tad more than the norms set, but, in reality, even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated.
(6) Rupee vs dollar
- The exchange rate of the domestic currency with the US dollar is a robust metric to capture the relative strength of the economy.
- A US dollar was worth Rs 59 when the government took charge in 2014.
- Seven years later, it is closer to Rs 73. The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.
What’s the outlook on growth?
- The biggest engine for growth in India is the expenditure by common people in their private capacity.
- This “demand” for goods accounts for 55% of all GDP.
- The private consumption expenditure has fallen to levels last seen in 2016-17.