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Resource centre on India's rural distress
 
 

Plunging down -Prabhat Patnaik

-The Telegraph

The Indian economy is in a quagmire

Data released by the National Statistical Office, which show the gross domestic product for the second quarter (July-September) of 2020-21 declining by “only” 7.5 per cent compared to the second quarter of the previous year, have been hailed in official circles as “good news”; on the contrary, they show the economy being stuck in a quagmire.

The first point to note is that while GDP declined by 7.5 per cent, private consumption in real terms fell by even more — by 11.32 per cent — which means that the share of consumption in GDP was lower compared to a year ago. Exactly the same is also true of the first quarter of 2020-21, so that during the entire first half of the current year private consumption has fallen more than the GDP compared to a year ago.

This seems strange. When income falls people do not lower their consumption proportionately. They run down cash reserves, or borrow, in order to maintain their consumption to whatever extent possible. The ratio of private consumption to GDP, therefore, is normally expected to increase when GDP falls. The fact that the opposite has happened and the ratio of private consumption to GDP has fallen suggests that the incomes of the working people must have fallen even more than GDP in this period, so that despite running down cash reserves and borrowing, they still could not maintain the share of private consumption in GDP.

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