Slowdown of the Indian Economy During 2019–2020: Deconstructing the Anomaly

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In this paper, we analyse the deep and anomalous economic slowdown in 2019–2020, when the Indian economy grew at a rate of 4 per cent, the lowest in a decade. We argue that the slowdown was largely confined to one year, 2019–2020. The growth rate in the prior years averaged 7 per cent a year, and in none of the other years was it significantly below this average rate of growth. In contrast to some of the prevailing narratives, the slowdown did not permeate widely across sectors and activities. It was concentrated primarily in the manufacturing sector. The agriculture sector grew faster than before, and the services sector experienced only a mild deceleration, that too in the last two quarters of the year. On the demand side, the slowdown was reflected in a sharp contraction in exports; while the deceleration in consumption was milder, investment growth was flat and government expenditure grew at a faster pace than in the previous decade. The slowdown can be accounted for by three factors. First, about a 50 basis points worth of the slowdown was due to the COVID-induced lockdown in the last week of March 2020. Second, more than 100 basis points worth of the slowdown was due to the collapse in exports, attributed both to a large global slowdown in trade and to the fact that India lost ground to other countries in maintaining its market share in a slowing market. Finally, the credit collapse from banks, non-banking financial companies and housing finance companies impacted economic growth. JEL Codes: E65, F40, O11, O47, O53