Covid-19 impact on GDP getting deeper

On Monday, the Union Finance Ministry admitted that the adverse impact of the Covid-19 pandemic and its associated lockdowns, is severe on the country's economy. According to the Ministry's macroeconomic report, revenue receipts of the Central government declined by a whopping 68.9 per cent so far this fiscal compared to the same period a year ago.

This steep fall in revenues was led by negative growth in personal income tax, all indirect taxes and non-tax revenues. As a consequence, the Centre went for higher marketing borrowings to fill the revenue gap. Data revealed that Centre's gross borrowings reached Rs 2.8 lakh crore till the middle of June this fiscal. That represents a 52 per cent jump from the same period in the last fiscal. Even the net borrowings were 12.3 per cent higher in the period.

Apart from the Centre, States also turned out to be active borrowers as revenue levels nosedived. Based on these numbers and citing the growth forecast released recently by the International Monetary Fund (IMF), the Ministry predicted a higher 4.5 per cent contraction in the country's GDP in FY21. In April this year, the Centre forecast an economic growth of 1.9 per cent for FY21. That means the latest projection is 6.4 percentage points lower than what the Centre has projected two months ago. This is a clear indication that the adverse impact of the Covid-19 pandemic is going to be much more severe than what has officially been estimated thus far. However, the Finance Ministry's report also listed out some green shoots in the economic activity.

These green shoots were noticed in power consumption, petroleum sales, highway transport activity and retail financial transactions. As per the report, petroleum consumption increased 47 per cent in May compared to April and the year-on-year contraction was much smaller at (-)23.2 per cent in May against (-)45.7 per cent in April. Total assessable value of e-way bills went up 130 per cent in May (Rs 8.98 lakh crore) as against Rs 3.9 lakh crore in April. Average daily toll collections on highways also jumped four times in May from the previous month. These numbers obviously indicate some positive traction in the economy.

But with Covid-19 cases going up by thousands daily and India, with over 7.2 lakh cases, replacing Russia from the third place in the global list of corona cases, it is too early to estimate the total impact of the pandemic on the country's economy. Global financial major Citigroup sharply lowered its forecast for the Indian economy, saying the country's GDP would contract six per cent in FY21. Its earlier estimate was (-)3.5 per cent. It cited the delay in flattening the Covid-19 curve as the reason for revising its forecast and said the spread of the virus has been most severe in the country.

That means the Indian economy will continue to lose steam as long as Covid-19 pandemic spreads. So, the Indian government will have to find ways to contain the pandemic in order to reduce its overall impact on the economy. If not, the economy will see much deeper contraction than the Centre's latest estimate of (-)4.5 per cent decline in FY21. It's time to brace up for more economic pain!