Over the past few weeks, there has been much talk about how the Indian economy is fast coming out of its technical recession. Such hopes are not without substantial justification - both in terms of the revival of economic activity within India as well as news of Covid vaccines being discovered.To get more economy news today, you can visit shine news official website.
There is an expectation that even if the Indian economy contracts in the current financial year - by, say, 10 per cent - it will perhaps grow by roughly the same percentage in the next financial year - 2021-22.
But it is important to remember that in times of such stark contractions and growth, one should not only focus on the GDP growth rates but also look at the absolute level of GDP. [The GDP or the gross domestic product is the money value of all goods and services produced within the country in a financial year.]For instance, if an economy's GDP were to contract by 10 per cent - from 100 to 90 units - in Year 1 and then grow by 10 per cent in year 2 - from 90 to 99, then at the end of the second year, the absolute level of GDP will still be lower than what it was two years ago.
Had the initial contraction not happened, this economy's GDP would have been 116.6 units - assuming an 8% average annual growth - at the end of Year 2.
From 99 units in Year 2, however, even if the economy resumes its 8% growth momentum as soon as it enters Year 3, it would require two additional years to even come close to the 116.6 units mark.
But, after a crisis, an economy can struggle with regaining its growth momentum. This may be especially true if the economy was losing momentum even before the crisis and/or if the response to the crisis was not adequate for the economy to quickly regain its lost momentum.
If this economy grows at an average annual rate of just 5 per cent (instead of 8 per cent) from Year 3 onwards, then it will take more than three years to reach the 116.6 units level of GDP.
A new report by Oxford Economics suggests something similar happening to the Indian economy. Oxford Economics has forecast that India's potential growth is likely to average just 4.5 per cent between 2020-2025, as opposed to its pre-virus forecast of 6.5 per cent. It is important to note here that 6.5 per cent is already lower than the average annual growth (6.8 per cent) India achieved since economic liberalisation in 1992.
The main culprit for this fall - from 6.5 to 4.5 per cent - in potential growth rate, according to Oxford Economics, is India's weak fiscal response, which magnified the structural drags. In other words, because the Indian government did not spend enough directly to push up the economy, the recovery would be slower.GDP per capita to be 12 per cent below our pre-virus baseline even in 2025, implying the largest amount of scarring among major economies globally," notes the analysis.
"It's likely that headwinds already hampering growth prior to 2020 - such as stressed corporate balance sheets, elevated non-performing assets (NPAs) of banks, the fallout in non-bank financial companies (NBFCs), and labour market weakness - will worsen," said Priyanka Kishore, head of India and South East Asia Economics.