Contraction of the Indian economy: will FY 2021-22 bring any real change?

The Indian economy contracted 7.3% in the financial year (FY) 2020-21. Though the contraction of the Indian economy in the FY 2020-21 was estimated long ago by different bodies, including the Reserve Bank of India (RBI), the actual figure has stirred an upheaval as it’s the worst in 40 years.

Prime Minister Narendra Modi is responsible for taking the economy into the abyss. An objective analysis of data in the public domain will show that there are chances that the Indian economy may contract even in FY 2021-22, despite double-digit GDP growth projections by big capitalist institutions.

Unemployment to remain the key reason for the contraction of the Indian economy

On the evening of March 24th 2020, when there were 563 COVID-19 cases in India, Modi suddenly announced a nationwide lockdown. Millions lost their jobs; the grotesque images of the migrant workers returning to their native places, walking hundreds of miles, haunted the conscience of many. According to a Pew Research study, 75m people joined the category of extremely poor in India, ie, those with a daily earning of $2 or less, due to the pandemic.

In April 2020, the unemployment rate shot up to 23.5%, a historic high. From June 2020, the unemployment scenario started slowly improving and in March 2021, it reached 6.5% with normalised economic activities. Though unemployment was on the rise since FY 2017-18, its spike in the FY 2020-21 caused a severe downfall in demand. The contraction of the Indian economy in the FY 2020-21 is majorly caused by this severe rise in unemployment and destruction of people’s livelihoods.

Even though the situation normalised by March 2021, the Modi regime’s nonchalant attitude towards the COVID-19 second wave wreaked havoc on India.

From April 1st, lockdowns started partially in Delhi and Maharashtra, and by the end of April, when the pandemic started ravaging India with daily infected number crossing 300,000 for days, several states imposed varied restrictions and lockdowns. Lockdown extension in different states also impacted the unemployment situation in India and it has reached 11.90% in May 2021 according to the Centre for Monitoring Indian Economy (CMIE).

In June 2021, in the first four days, the unemployment situation hovers at 12.4%, the highest since June 2020. There has been a sharp fall in the labour participation rate as per the CMIE, which fell to 39.98% in April 2021, which is the lowest since May 2021. The CMIE data showed that the labour force shrank by 1.1m in April 2021 alone. The situation further worsened in May 2021.

Inflation surge rings an eerie alarm

As unemployment surges, inflation too is catching up. Though the retail inflation moderated to 4.3% in April from 5.5% in March 2021, the rating agency Crisil has estimated a 5% inflation for the FY 2021-22 vis-à-vis a 6.2% inflation in the FY 2020-21. However, as data collection is disrupted in April and May 2021, it’s not clear how much real inflation has soared. In the meantime, the wholesale price index (WPI) reached 10.4% in April vis-à-vis 7.4% in March.

The constant fuel price rise continues to abet inflation, especially food inflation. Edible oil prices are also spiking. The retail price of mustard oil has reached nearly Rs 200 per litre vis-à-vis Rs 100 a litre for petrol. The RBI has estimated that the fuel prices will remain “volatile”, which indicates that in the FY 2021-22, retail inflation will see a massive surge, which, followed by the rising unemployment will worsen the economic crisis.

On June 1st, petrol and diesel prices were again hiked after 16 hikes in May 2021. According to The Indian Express, the petrol price in Delhi was Rs 94.49 per litre while diesel was Rs 85.38 per litre on June 1st. On the same day, the petrol price was Rs 100.72 per litre, while diesel was retailing at Rs 92.69 per litre in Mumbai.

High oil prices will severely impact inflation and people will have to shell out more money for their daily essentials, including food, which will reduce other spending and affect the industrial goods’ market, triggering more unemployment.

Capitalists rejoice as the economy goes down

While millions are losing their jobs and falling into the poverty pit, it’s the big capital that’s making huge profits. The Indian stock markets have a muted response to the rising COVID-19 crisis.

Gautam Adani recently became the second-richest Asian, after Mukesh Ambani. Both are Modi’s patrons. Amid the COVID-19 pandemic, Adani Group’s market capitalisation touched the Rs 1.5 trillion mark. This is a 13.6% jump in the BSE and 6.5% in the Sensex index. This at a time when the farmers’ protest against three pro-Adani farm laws turned six-month-old.

Where will the Indian economy head to in the FY 2021-22

There are various speculations made regarding the Indian economy’s growth in the FY 2021-22. The United Nations’ World Economic Situation and Prospects (WESP) projected 10.1% growth for India in the calendar year of 2022. The Asian Development Bank predicted an 11% growth for the same period.

The International Monetary Fund (IMF) had projected a growth of 12.5% in 2021 and 6.9% in 2022. Now, the IMF’s projection regarding the contraction of the Indian economy in the FY 2020-21 was 8%, which was nearly close to the -7.3% growth India achieved. But in the given situation, can India even reach anywhere close to 12.5% growth in the FY 2021-22?

Most of these projections were made during the Q3 of the FY 2020-21. The growth in Q4 boosted these projections as it was estimated that India will walk on the recovery path throughout FY 2021-22. However, the COVID-19 second wave affected several industries, mostly the unorganised sector. The situation has not yet normalised and the third wave from September-October 2021 poses a bigger threat to the country.

The economy is severely impacted due to the continuing restrictions, especially the unorganised sector that employs 90% of the Indian workforce. The vaccination programme, which is seen as a key to normalcy, won’t even complete in three years and, therefore, the COVID-19 crisis will continue to disrupt the Indian economy.

To ensure a healthy economy, the government must scrap the total lockdown policy and adopt a scientific solution. For this, it’s important to formulate an economic policy that can generate public sector employment. Without employment generation through the organised public sector, and without creating a market for industrial goods with a higher purchasing power for the majority, the contraction of the Indian economy in the FY 2021-22 can’t be stopped. But will the government even listen to this? Under Modi, there’s no redemption.