The global economy was already slowing down when Covid-19 struck. As nations across the world went into complete lockdown spanning weeks, their economies came to a grinding halt. Everybody already knew about the impending catastrophe and the year’s second quarter GDP figures only helped to quantify the actual damage.
According to Statista, The Chinese economy had shrunk by 6.8% in the first quarter of 2020, but it experienced a V-shaped recovery with 11.5% positive growth in the second quarter. In US where the pandemic claimed a larger share of lives in comparison with the rest of the world, the economy was worse hit. The country witnessed a loss of 9.1% in GDP in the second quarter compared with the first quarter’s -31.7% (annualized).
India, where the lockdown was very strictly implemented with almost zero economic activity (with the exception of essentials) in the month of April and marginally relaxed lockdown in May and June, the economic contraction was massive. India’s GDP fell by 25.2% (23.9% in country’s own figures) in the April-May-June quarter – making Indian economy worst effected by the pandemic, followed closely by UK, as recorded by the OECD.
South Korea suffered a much smaller loss of -3.2% contraction of GDP, most probably as the country had kept its economy fairly open despite the pandemic threat. Japan also succeeded in keeping its businesses operating and suffered a loss of 7.9% in GDP in the second quarter.
What does the 23.9% GDP drop actually mean for India?
In retrospect if you actually think about how badly the Indian economy tanked in April due to the stringent lockdown measures, the decline of only 23.9% actually appears surprising. Yes, the lockdown eased in phases, but still the economy couldn’t be working at more than 40% in May and 60% in June. That implies, the Indian economy was down by about 57% in the second quarter of 2020 in comparison with the level in 2019.
Even if we were to assume higher optimistic figures of economic operation for the period, the GDP decline would not be any lass than 47%. The million-dollar question that now arises is – why is the official data is not reflecting a similar decline?
To answer that, we must understand the mechanism of measuring India’s GDP that is currently practiced. The quarterly GDP data basically comes from India’s organized sector and is based on limited data such as the Index of Industrial Production, corporate companies who release their reports, banking data and railways traffic. From the unorganized sector only agriculture data is used.
The unorganized sector of India accounts for 45% of Indian economic output and is responsible for 94% of the country’s total employment. Apart from agriculture, the rest of this sector’s data is collected only once in five years and in the interim, data from the organized sector is assumed to be its proxy. While this mechanism might work under normal circumstances, it is not enough in the aftermath of huge disruptions, the likes of demonetization and the Covid-19 pandemic.
The unorganized sector of India constitutes of small businesses that do not have enough money to survive large periods of economic stagnancy and would have experienced a decline of at least 70-80% during the said period. Hence, we might conclude that the actual economic loss for the second quarter of 2020 for India, is much higher than the projected figure of 23.9%.
These factors make India’s economic situation worse than other countries – what India is experiencing is not just a recession but economic depression and to come out of this dire situation government must take bolder and conscious steps with the intention of helping the unorganized sector to the fullest.