The Policy Adventurism That Has Led India to its Economic Woes

Context: Recent economic data shows a decline in Gross Domestic Product (GDP) of 23.9%, which is the worst among major economies.

Declining Economic Parameters:

• Decline in overall GDP of 23.9%
• Largest contractions were in construction (-50.3%), trade, hotels, transport and communication (-47%), and manufacturing (-39.3%), 

• Together, they account for three-fourths of all non- agricultural employment in the country and 43% of all workers.

• Forecasters estimate a decline in GDP of more than 10% this fiscal year.

• Pre-pandemic declining features: 

• Manufacturing Sector: Gross value added (GVA) in the manufacturing sector has contracted in the last four quarters.
• Construction: It has been contracting for three quarters.
• Other Sectors: Trade, hotels, transport and communication, as a group, has seen its GVA decelerate. 
• Decelerating GDP:  India’s official GDP growth rate was decelerating from 8.2% in the fourth quarter of 2017-18 to 3.1% in the same quarter of 2019-20.

Government’s policy adventurism that led to deceleration in the last two years 

• Demonetization and Goods and Services Tax (GST): 

• Abrupt demonetization of late 2016 and a hasty roll-out of the GST within a year.
• Demonetization disrupted the operations of most enterprises in sectors that rely heavily on cash transactions while GST raised their compliance costs

• Tax waiver for India’s corporate sector: ?1.5 trillion was waived
• Unorganized sector ignored: Government’s reluctance to help the unorganized sector before the pandemic has not only delayed economic recovery but also made it hard to tackle a humanitarian crisis.

• Strictest Lockdown: While a lockdown was desirable, and it did slow the transmission of infections but the strict restrictions imposed without either warning or preparation, led to policy adventurism.