3-quarter low: GDP growth slows to 7.1% in Q2 – Major services sectors subdued

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New Delhi | Updated: Dec 01, 2018 9:13 AM

India’s gross domestic product (GDP) expanded at a lower-than-expected 7.1% in September quarter (Q2) of the current fiscal, as a deceleration in key service industries that began in the final quarter of last fiscal persisted, private consumption slowed and the drag-down effect of ‘net exports’ aggravated.

GDP growth slows to 7.1% in Q2

India’s gross domestic product (GDP) expanded at a lower-than-expected 7.1% in September quarter (Q2) of the current fiscal, as a deceleration in key service industries that began in the final quarter of last fiscal persisted, private consumption slowed and the drag-down effect of ‘net exports’ aggravated.  Public expenditure continued to back the economy in a big way, helping to an extent to crowd in private investments, but the latest data still prompted analysts to pare down their forecasts for the second half of the year. Sub-7% growth earlier predicted by most for the fourth quarter of this fiscal might kick in earlier, many of them said with the benefit of the latest data, while settling for full-year growth estimates of around 7% versus near-7.5% prognosticated earlier.

The Q2 growth figure has nullified the chances of a rate hike by the monetary policy committee at the December 5 review and engendered some hope of even a reduction in the rates, especially since retail inflation slowed to a benign 3.3% in October. The RBI had put the GDP growth for FY19 at 7.4% while the finance ministry in August said the rate could even exceed 7.5%.

The economic growth had accelerated for four quarters in a row and peaked at 8.2% in June quarter (Q1). While a favourable (low) base added half a percentage point to the Q1 growth figure, it also seemed to reflect a pick-up in manufacturing, construction, agriculture-allied sectors besides a gathering of momentum in private consumption, the largest constituent of GDP, with close to 55% share.

The Q2 data, however, unsettled that narrative. Some analysts even warned of an ‘acute slowdown’ in private demand, largely reflecting the rural (farm-sector) distress. Among key sectors, financial services, which have witnessed a sub-7% expansion for five quarters now, could come under greater pressure in H2 as the NBFC liquidity crisis became more pronounced, post-Q2.

A saving grace about national income data released by the Central Statistics Office on Friday was an acceleration in investment growth. Also, utility services — gas, water supply — saw a seven-quarter-high expansion in Q2.

Gross fixed capital formation (GFCF), its closest proxy of investments, expanded at a robust 12.5% in Q2 over the rather strong base in the year-ago quarter — as share of GDP, GFCF grew from 30.8% in Q2FY18 to 31.6% in Q1FY19 and further to 32.3% in Q2.

Economic affairs secretary Subhash Chandra Garg tweeted: “GDP growth for second quarter 2018-19 at 7.1% seems disappointing. Manufacturing growth at 7.4% and agriculture growth at 3.8% is steady. Construction at 6.8% and mining at -2.4% reflect monsoon months’ deceleration. Half-year growth at 7.4% is still quite robust and healthy.”

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Garg had earlier reiterated that the this year’s fiscal deficit target of 3.3% of GDP for the Centre would be met. Clearly, this means a deceleration in public-capex routed through the budget for the second half, a factor that further threatens the short-term growth trajectory, apart from a withering off of the favourable base.

The central government accounts published separately during the day showed a robust 19.7% year-on-year rise its budget expenditure in Q2, but its capex declined 3% during the quarter. Given that 59% of the annual budget capex of Rs 3 lakh crore was spent in April-October period, a slowing of budgetary capital spending and at least a moderate cut in overall expenditure itself seem inevitable given the trends and likelihoods on the revenue front. A spurt in capex by state governments — aggregate capital expenditure of 20 major states reviewed by FE recently for the April-September period was 16% higher than in the year-ago period — and other modes of public expenditure like extra-budget CPSE spends could, however, help to somewhat sustain the momentum in public expenditure.

Government final consumption expenditure (GFCE) grew at a solid rate of 12.7% in Q2, though on weak base (growth was only 3.8% in Q2 last year). GFCE anyway can’t be long-term growth driver (its share of GDP is just around 12% for that matter).

Rupa Rege Nitsure, group chief economist at L&T Finance Holding, said there is an “acute slowdown” in private demand and it’s slowing down at a faster pace in rural than in urban areas. “I expect the government to take growth-boosting steps as well as rate cuts by the monetary policy committee in the January-March quarter, as inflation has crashed with food prices falling. The risks of elevated oil prices and rupee depreciation are also controlled. There is rural distress.”

On the positive side is a decline in crude prices over the couple of months, which has slightly reduced the fiscal pressures for the government. However, typical uncertainties around corporate investment decisions ahead of elections and slower non-banking lending in the aftermath of the IL&FS crisis could weigh down growth momentum in H2. Poll-related spending, however, could partly offset the negative impact.

Growth in gross value added (GVA) dropped sharply to 6.9% in Q2 from 8% in the previous quarter. India Ratings chief economist DK Pant said core GVA (excluding agriculture and public administration and defence) grew even at a lower pace of 6.6%, a five-quarter low.  The sequential moderation in the construction segment to 7.8% in Q2 from 8.7% in Q1 is due to seasonal effect (monsoon slows such activities). But with NBFCs facing a credit squeeze, slowdown risks for the realty sector can’t be ruled out, analysts said.

Aditi Nayar, principal economist at Icra, said: “An uneven and sub-par monsoon, flooding in some areas amid a late withdrawal of the monsoon rains, and instances of crop damage and pest attacks, contributed to the (sequential) slowdown in agricultural growth in Q2.” Moreover, the deficit in post-monsoon rainfall and lagging rabi sowing cast a shadow over farm growth in the second half of FY19, she added. This, along with a moderation in food inflation in recent months, could keep rural sentiment subdued and weigh on consumption expenditure.

The considerable uptick in discrepancies (22.7%) in Q2 FY2019 from a year before suggests that the pace of growth of the components of GDP may undergo a revision when subsequent estimates are released, Nayar added. Valuables jumped 12.4% in Q2, against an 8% fall in Q1, suggesting a jump in gold imports.

At $49.4 billion, merchandise trade deficit worsened in Q2, against $44.9 in the previous quarter, thanks to huge electronics imports, among others. Higher deficit accentuated the dragdown impact of net exports on GDP.

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