The International Monetary Fund had estimated India's GDP growth to be 1.9% about a month ago. On 22 May 2020, Reserve Bank of India (RBI) Governor Shaktikanta Das said that the Covid-19 pandemic would possibly cause India's gross domestic product (GDP) to decline in the financial year 2020-21. What does the decline in GDP mean for the economy? Statistically speaking, this means that the GDP of 2020-21 will be lower than that of 2019-20. Who can have this effect?
5% taxpayers' share in 90% income tax
Just over 50 million income tax returns (ITRs) were filed in the assessment year (AY) 2018-19. The total income reported by those filing ITRs shows that these 5 crore people constitute just 12.5% of the total workforce, which accounted for 30% of India's GDP. Income of the top 5% of the five crore people who filed ITRs accounted for 15% of India's GDP. It also means that India's direct tax collection depends on the income of the richest people. The top 5% taxpayers paid around 90% income tax in 2018-19. At the same time, during contraction in GDP, the poor get poorer. At the same time there is a big drop in the income of rich people, which reduces the government's ability to help the poor.
Agricultural contribution to GDP likely to increase
GDP is a sum of income generated in various sectors of the economy. India has seen four instances of declining GDP since 1951-52. India 1957-58, 1965-66, 1972-73 and 1979-80 saw a major decline in India's GDP. Crisil's research also states that this slowdown was mainly a result of problems in the agriculture sector. In three of these four years, the decrease in agricultural GDP was greater than the overall decrease in GDP, meaning that the non-agricultural economy did not affect much. Most forecasters are expecting the reverse this time. It is the non-agricultural sector, in which the decline is expected to be greater, while the contribution of agriculture to GDP is likely to increase. The share of non-agricultural sector in both production and employment is much higher than today, when India is already facing GDP contraction.
In 1980, agriculture accounted for one-third of total value-added and more than two-thirds of employment. Now it has come down to less than 15% and above 40% respectively. This means that the current contraction in terms of income will affect a large part of the economy. The fact that there was no contraction before does not mean that income was increasing in India.
CCS questions the current perception of income with three options such as, increase, remain the same or decrease. To be sure, CCS only measures urban sentiment. There is reason to believe that rural areas were not better. Real rural wages have been declining in the last few quarters. Even when GDP growth was positive, the RBI survey showed a decline in income. This share increased during the recent economic downturn. It will now grow at a much faster rate.
Many people will lose their jobs
A contraction in GDP is a threat to the job at large. Businesses will also be affected there. Expenses will require people to use their savings. However, the situation has deteriorated on this front too. In India, the domestic savings rate has come down in the last decade. Savings stood at 23.6% in 2011-12, falling to 18.2% in 2018-19. This means that people are already losing their savings. The 2013 National Sample Survey Office report (latest available data) shows a more serious figure. About 90% of the domestic wealth in India is either in the form of land or buildings. Due to the current economic crisis, the real estate is already facing problems and is surrounded by roads. In such a situation, if a person wants to sell his real estate, then he should keep from getting fair price.
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