First of all, the low Q2 number confirms that the stunning GDP growth of 8.2% in the Q1 was an "aberration" led by favourable "base effects".
India’s Gross Domestic Product (GDP) growth in the second quarter of the financial year 2018-19 slowed down to 7.1%, from 8.2% recorded in the previous quarter, which, experts say, does not make the outlook “rosy”. In fact, the Gross Value Added (GVA) did not even touch the 7% growth mark.
It was expected that the GDP growth rate in the July-September quarter would be lower than the previous quarter, but the final number was even lower than the widely expected 7.4% growth rate. Even the DEA Secretary SC Garg said that the GDP growth at 7.1% “seems disappointing” (Read full story here).
- GDP: 7.1% vs 8.2%
- GVA: 6.9% vs 8%
- Agriculture: 3.8% vs 5.3%
- Financial, Real Estate & Professional Services: 6.3% vs 6.5%
“There is a need to revise down growth projections as growth for the whole fiscal year could remain at around 7%,” said NR Bhanumurthy, an economist at National Institute of Public Finance and Policy.
What really went wrong
First of all, the low Q2 number confirms that the stunning GDP growth of 8.2% in the Q1 was an “aberration” led by favourable “base effects”, Aditi Nayar, Chief Economist, ICRA said.
The services sector, one of the key components for GDP growth, was hit and stayed at around 6.3%-6.5%. State Bank of India Chief Economist Soumya Kanti Ghosh said that trade and finance have remained stuck at 6%-6.5% for the two-three quarters now. Moreover, consumption lately has declined, which will in turn impact investment in the coming days. “The outlook does not look rosy,” Ghosh said.
Also Read – India Q2 GDP: All key figures in a nutshell
The slowdown in private consumption dragged overall GDP growth down to 7.1% in Q2, Dharmakirti Joshi, Chief Economist, CRISIL told FE Online. Agriculture growth slowed in Q2 compared with Q1, though it is still growing above trend. But alarm bells are ringing on farmer income.
Former Chief Statistician Pronab Sen said that the services sector has two components: One that is dependent on agriculture such as trade and the other is the financial sector. He said that the liquidity crisis in the non-banking finance companies hit the services sector growth.
Teresa John, Economist at Nirmal Bang Institutional Equities, said that the government expenditure has grown at a lower rate than anticipated. The growth in the next two quarters could be slightly lower than this because you have an adverse base kicking in and then the NBFC (non-banking financial company) crisis.
Now all eyes would be on the Reserve Bank of India. In the October Monetary Policy Meeting, the central bank maintained the status quo but changed the stance from ‘neutral’ to ‘calibrated tightening’, which, governor Urjit Patel said, meant that rate cut was off the table.
It would be interesting to see if the RBI goes back on the stance and cuts key repo rate to boost growth as the inflation has been lower than the 4% ceiling.
However, the expectation is that the RBI would go ahead with another status quo. The repo rate currently is 6.5% and the December MPC of the RBI is scheduled from December 3-5.
First published on November 30, 2018 on www.financialexpress.com.