GDP of India. What caused such a huge drop and how can we overcome it?

The basic concept of GDP was introduced by William Petty during the warfare situation between the Dutch and the English opposing the system of unfair taxation in the late 1600’s. Later, Simon Kuznets, an American economist developed the modern concept of GDP in the year 1934 and at the Bretton Woods Conference in 1944, this concept was declared to be a significant way to measure a country’s economy.

Gross Domestic Product (GDP) is the total monetary value of all the finished goods and services that are produced within a country’s territorial borders in a specific period of time. It is a concept that provides an overview of the economic standing of a country and also plays a key role in estimating the growth rate of an economy.

In India, the GDP is calculated by India’s Central Statistical Office (CSO) using two different methods, first is based on the economic activity and the other based on expenditure activity which includes within its scope, trade, investment, personal expenses etc.

The CSO functions under the Central Government and performs various tasks such as conducting surveys, maintaining statistical data, coordinating with State and Central agencies for data management. For the purpose of calculation of GDP, 8 key industrial sectors are taken into consideration that have a large contribution to the economic status of the country.

The current coronavirus (COVID-19) global pandemic has led to crashing down of the economies of many countries. India has been one among the most affected countries, not only in the spread of the virus but also in terms of downfall of the economy.

The entire country entered into a lockdown phase in late March in the wake of the pandemic which was extended a few times keeping various economic activities on halt due to which the Indian Economy shrank to nearly 23.9% in the second quarter of 2020, making it India’s worst performance in terms of economic growth since the country began reporting quarterly GDP data in 1996.

The GDP is generated based on four engines of growth namely demand for public consumption, demand for goods and services by the government, demand by private sector businesses and the net demand which is calculated by deducting India’s imports from the exports.

These four engines have led to the fall in GDP as the government has imposed restrictions on trade and commerce, transport services, day-to-day activities etc. In addition to these, public and private offices were closed deteriorating the quality and efficiency of services, industries and factory outlets were also not functioning leading to loss of livelihood and lack of production which indirectly affected the consumption rate.

As is acknowledged, India is a developing country with a rapid growth in population and high level of unemployment. The pandemic has in all means worsened the employment rate and has also disrupted the supply chain by slowing it down and jeopardizing the economy. Based on various studies, many economists have said that over 40 million people have lost their jobs in the unorganized sector.

As the entire nation is on hold, many companies, industries, factories, organisations etc are incapable of self-funding or they are out of budgets or they have exceeded their expenditure etc because of which they are not in a financial position to provide employment opportunity to people. On a larger scale such difficulties have also contributed to the declining of GDP.

Investment being one of the major aspects of the GDP has also decreased as the economic stability of many countries has been affected putting their business, funds, economy, financial status, lifestyle etc in jeopardy. As International investments are made by keeping a watch on how their investments shall flare in the country’s economy, they choose to move their funds based on economic status of a country which has also additionally contributed to the downfall of India’s GDP growth rate.

To overcome the economic crisis faced by India, the government can make certain amendments to monetary policies that govern the financial activities. Reducing interest rate would be another sensible option to improve the economic status.

By reducing the interest rate, there is a direct impact on borrowings which leads to an increase of the disposable income of firms and households enabling one to spend and invest more.

Amendments to fiscal policies could also be another way to improve the situation. By reducing tax rates, the disposable income of an individual increases which allows them to spend more and the government influences more demand by using such methods. The government can also invest in infrastructure that shall be beneficial to stimulate demand and create more employment opportunities. Increase in real wages is also another route to ensure consumers have more disposable income to spend.

Various mechanisms from the private sector are beyond the ambit of the government and can contribute to the positive impact on the GDP such as, by improving the rate of technological innovation, by providing flexible surroundings to work, by boosting up the moral of the workers etc. Another effective way to influence the GDP in a positive way would be by increasing the level of savings which enable higher and better investments.

It can be concluded that GDP is an important element of a country as it gives information about the growth and performance of the economy. An increase in GDP is interpreted to be a sign that an economy is flourishing. In current times, India’s GDP is falling down and the government must take reasonable measures to ensure that it lifted up and this could be done by creating more disposable income and by boosting the domestic demand.