India's economy contracts by record 7.3 percent in FY 2020-21

Asia's third-largest economy was hit hard by the strict national lockdown that was imposed to contain COVID-19, which put millions out of work for months. 

Created On: Jun 1, 2021 12:59 ISTModified On: Jun 1, 2021 12:59 IST

The Indian economy contracted by 7.3 percent in Financial Year 2020-21, as per official data released by the Statistics Ministry on May 31, 2021, recording its worst recession since independence.

Asia's third-largest economy was hit hard by the strict national lockdown that was imposed to contain COVID-19, which put millions out of work for months. 

There was some sign of revival though with the economy growing by 1.6 percent between January and March 2021, the fourth quarter of the fiscal year 2020-21, after two successive quarters of contraction.

Key Highlights 

• In comparison to the previous three months of FY2020-21, India's annual economic growth rate picked up in January-March 2021. 

• Consumer spending, which is the main driver of the economy, rose 2.7 percent year-on-year in January-March following a revised 2.8 percent fall the previous quarter.

• The annual growth of 6.9 percent in manufacturing and 14.5 percent in construction during the quarter also reflected signs of a recovery.

• Investments also rose by 10.9 percent in comparison to the growth of 2.6 percent the previous quarter. 

• The state spending jumped 28.3 percent after almost no growth in the October-December period.

• While this raised hopes for an early revival of the economy, the deadly second wave of the COVID-19 pandemic hit the country in April 2021, forcing state governments to impose local lockdowns to break the chain of transmission. 

• India had recorded a record-high number of daily infections with the number surpassing even 4 lakh. 

• Though there was no national lockdown, the state governments announced strict state lockdowns or corona curfew in April and few others followed in May. 

• While most states are still under strict lockdowns, few have begun to unlock from June 1st after a major fall was witnessed in the number of new infections. 

• However, economists are increasingly pessimistic about this quarter as the local restrictions heavily hit economic activities such as retail, transport and construction. 

India's economic growth forecast for FY21-22 cut down

• India's gross domestic product grew by 1.6 percent in the January-March quarter, in comparison to the same period a year earlier.

• The growth was mainly driven by state spending and manufacturing sector growth. 

• However, this growth is likely to contract in the April-June quarter due to the spread of the virus to rural areas in the second wave, impacting the rural demand and sectors dependent on the rural economy.

• This has forced economists to cut their growth forecast for FY 2021-22 To 8 per cent-10 percent from earlier 11 per cent-12 percent.

• India has also revised its annual GDP estimates for the fiscal year, predicting a 7.3 percent contraction, narrower than its earlier forecast for a downturn of 8.0 percent.

• As per economists, the country now faces a slowdown in consumer demand as household incomes and jobs have declined and there is limited scope for the government to offer growth stimulus due to its rising debt.

Likely reasons for slow economic growth 

• The centre has been slammed for the slow pace of its vaccination campaign, as India has so far only managed to vaccinate fewer than 4 percent of its 1.38 billion people.

• The Reserve Bank of India stated last week that India's growth prospects will depend on how fast the country can contain its infection rate. 

• Unemployment has also risen to a near one-year high of 14.7 percent in the second last week of May, as per the Centre for Monitoring Indian Economy, a Mumbai-based private think tank.

• The economic growth prospects will be pulled down further if the predicted third wave hits the country. 

Background

India has recorded a total of 28 million COVID-19 infections, second only to the United States. India has also recorded a total of 329,100 deaths and become the third nation after Brazil and the United States to cross 3 lakh Covid deaths.

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