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India’s Plunging GDP: A Panoramic View of the Big Fall

India’s Plunging GDP: A Panoramic View of the Big Fall
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This has underlying implications for estimates of the macroeconomic indicators and components used to calculate the nation’s GDP, which we will discuss later. The overall picture appears worrying, and it does not necessarily paint an accurate picture of India’s economic health—the fault lines extend beyond the GDP decline of 23.9%.

Figure 1. First-Quarter GDP Expenditure Estimates (INR Bil. and YoY % Change)

Item 1Q20
(INR Bil.)
(INR Bil.)
YoY Change (%)
Private Final Consumption Expenditure (PFCE) 19,929 14,611 (27)%
Government Final Consumption Expenditure (GFCE) 4,182 4,866 16%
Gross Fixed Capital Formation (GFCE) 11,321 5,991 (47)%
Change in Stocks (CIS) 673 533 (21)%
Valuables 513 46 (91)%
Exports 7,085 5,679 (20)%
Imports 8,257 4,922 (40)%
Discrepancies (95) 89 N/A
GDP 35,352 26,895 (23.9)%

Source: Ministry of Statistics and Programme Implementation/Coresight Research

Breaking Down the GDP Constituents

Like any other country, GDP in India is a function of private consumption, net investment, government expenditure and net of total exports and imports. We briefly discuss these below.

  • Private Final Consumption Expenditure (PFCE): PFCE denotes the final consumption expenditure of households and non-profit institutions such as religious places. India’s PFCE fell by 27% year over year to ₹14.6 trillion ($199 billion). Consumption is the largest constituent of India’s GDP and accounted for 54.3% of the total in the first fiscal quarter. Consumption is unlikely to reach pre-pandemic levels in the short-to-medium term, with the consumer confidence index recording an all-time low of 83.7 for the first quarter of 2020. Another important factor is the high unemployment rate in India: Although the unemployment rate substantially improved from a record 23.5% in April to 8.35% in August, it remains an issue overall.
  • Gross Fixed Capital Formation (GFCF): GFCF, or net investment, is a measure of net increase in fixed capital. Investment is a function of interest rates and is inversely proportional to the interest rates. India’s central bank announced a repo rate (interest rate at which commercial banks can borrow money from the central bank) cut of 40 basis points in May this year, reducing the interest rates to 4%—the lowest since 2000. The monetary policy (money supply control by the central bank) has proved to be ineffective in reviving investment thus far. We expect borrowers to be wary in the short term as overall domestic demand remains muted. Furthermore, based on Gross Value Added (GVA) data, the expenditure estimates were the weakest for construction, down 50.3% year over year for the three months ended June 2020.
  • Government Expenditure: Government expenditure contributed positively to GDP estimates in the first quarter. For the three months ended June 2020, the government expenditure was up 16% year over year, amounting to ₹4.9 trillion ($66.2 billion). With deflated consumer demand and dried-up investment, the government’s tax revenue is expected to be less than half of what was initially estimated for the full fiscal year. We discuss the Union Government accounts in detail at the end.
  •  Net Exports: In the first quarter, imports fell by 40% year over year, while exports were down 20%. With multiple restrictions in place, the indicators directly related to imports and exports fell steeply year over year in the first quarter—cargo handled at major seaports was down 19.8% and cargo handled at airports was down 57.2%. Net exports have continued to contribute 3–4% to overall GDP. We expect both exports and imports to improve gradually in the coming months, remaining at 3–4% of overall GDP and not having a significant impact on GDP movements.

India GDP Estimates: Unveiling the Bias

Not only did the countrywide lockdown impact various sectors that contribute to the GDP but also the data collection mechanism. There are strong reasons to believe that there could be an upward data bias in the overall GDP figure. First, the deadline to file quarterly reports was extended for corporate entities, which had until September to disclose earnings. Second, GST (goods and services tax) payments due in March were allowed to be postponed to June—giving an upward bias to the first-quarter estimates. Finally, according to the official press release by the Ministry of Statistics and Programme Implementation, the data challenges in computing macroeconomic indicators such as the Index of Industrial Production and Consumer Price Index are expected to have implications on GDP estimates.

On the other hand, the lockdown severely impacted the informal sector. According to the GVA data, the unorganized or informal sector had a share of over 50% of overall GVA in 2018—a figure that has remained somewhat at the same level since the beginning of this decade. In a country of 1.35 billion people and that has a gigantic informal sector, the reliance on survey data is inevitable. The major sources of data are enterprise surveys and employment surveys, which are carried every five years by the National Sample Survey Office (NSSO). The last recorded survey by the NSSO dates back to results from the 12 months ended June 2016.

Taking a step back, in November 2016, the Government of India moved ahead with its decision of demonetization, which stripped ₹500 and ₹1,000 bills of legal tender status. This severely affected the informal sector due to a lack of awareness and limited penetration of the formal banking system in the rural and remote areas of India. More recently, migrant daily workers—the backbone of India’s informal sector—lost their livelihood when the Covid-19 lockdown was announced in March, and many had to walk back to their native villages fearing starvation. In a nutshell, no level of data extrapolation can account for the big dents to the informal labor sector caused by demonetization and the strict lockdown.

GFCE: The Only Positive; a Big Negative

The GFCE for the three months ended June 2020 amounted to ₹4.9 trillion, up 16% from the year-ago period (see Figure 1). The increase can be attributed to India’s stimulus package, which was announced in May this year. At the time of the announcement, the sum amounted to ₹20 trillion ($265 billion)—around 10% of total GDP. However, as the details were revealed over five days by India’s Finance Minister Nirmala Sitharaman, the stimulus spending summed to just around 1% of India’s GDP. The miniscule fiscal stimulus has proved anything but effective in reviving the economy from an inevitable downturn.

India’s fiscal deficit was ₹8.2 trillion as of July 2020, 103% of the fiscal deficit estimate for the fiscal year ending March 2021 (see Figure 2).

Figure 2. Union Government Accounts, as of July 2020 (INR Tril.)

Item FY21 Full-Year Budget Estimates (INR Tril.) Budget Estimates
(% of Total)
Net tax revenue 16.36 12.4%
Non-tax revenue 3.85 6.4%
Non-debt capital receipts 2.25 2.4%
Total revenue 22.46 10.4%
Revenue expenditure 26.3 35.8%
Capital expenditure 4.12 27.1%
Total expenditure 30.42 34.7%
Fiscal deficit 7.96 103.1%

Source: Controller General of Accounts, Ministry of Finance/Coresight Research


The overall sentiment in India’s economy is of caution. Although we expect the economy to pick up in the second half of the year, it will not be enough to guard against an expected annual contraction in the range of 3–5%. With a huge debt problem, the remaining three quarters will test the government’s fiscal prudence as it tries to bring the economy back to life.