Why did the Indian economy shrink by 24 percent?

Latest data suggests that the Indian economy has shrunk by 24 percent - its worst performance in four decades. 

The news could not have come at a worse time for Prime Minister Narendra Modi as India is embroiled in a border dispute with neighboring China, while coronavirus cases have also shot through the roof. 

The steep slump in the April-June quarter follows a haphazard lockdown New Delhi imposed in March on short notice, leaving millions of workers stranded in the cities. 

Images of labourers, who had come to work in urban centres, dying alongside roads have already damaged Modi’s ruling Bharatiya Janata Party (BJP). 

That lockdown, which effectively shut down shops and factories, forced people to cut back on spending, had a forceful impact on the economy. 

The production of everything from coal, cement, and steel to trucks dropped by double digits compared to the same period of last year. 

India needs to continuously grow its GDP to accommodate the 12 million young people who enter the market every year. 

What’s even more concerning is that the “draconian” lockdown has not helped stop the spread of Covid-19. India is now being dubbed the epicentre of the virus, with more than 79,000 infections being reported in one day. 

The economic engine in the country of 1.4 billion, was stuttering even before the pandemic hit as GDP growth rate had slowed. Experts blame Modi’s government for much of the trouble. 

In 2016, his government introduced a demonetisation scheme amid much fanfare, promising that it would help fight corruption. 

Instead, the process of replacing lower denomination banknotes, left poor farmers and small businesses reeling under losses as they faced difficulty in finding banknotes for their cash transactions. 

Once the world’s fastest growing economy, India is now heading for a full-year contraction, according to Bloomberg. 

What is troubling is that unlike other major economies where central banks have flooded the markets with cash, New Delhi does not have much leverage as it battles inflation and a budget deficit at the same time. 

A crisis in the banking sector has made matters worse. For years, there have been concerns that Indian banks are sitting on bad loans, which will haunt economic managers. 

Now, banks are cutting back on lending amid fears that businesses will go bankrupt or will not be able to pay back the loans - something that compounds the country’s economic woes. 

A large number of Indian workers are employed in what is known as the informal sector - labourers, rickshaw drivers, workers at tea stalls - who are not accounted for in the official data. 

This has led some analysts to believe that the actual GDP figure could be even worse as the pandemic has affected the livelihood of the poorest. 

The steep contraction is a setback for Prime Minister Modi who was aiming to make India a $5 trillion economy by 2025. Last year, it was measured at $2.9 trillion, the fifth largest behind the US, China, Japan and Germany. 

Other major economies, including the United States, Japan, Germany, Canada, Turkey and others have all seen a contraction in the second quarter of this year. The UK saw a contraction of 20.4 percent in the same period.