Manufacturing, investment worst hit; nominal GDP growth at 67-quarter low of 6.1%.
While subsequent high-frequency data indicated that India’s GDP growth slowdown might not have bottomed out even in the September quarter, the much-watched official data released on Friday showed almost all sectors of the economy, save the government, continued to slide further in the quarter to report an overall expansion rate of just 4.5%. This is the lowest quarterly growth for the country since Q4FY13, or a 26-quarter low.
The economic growth for the first quarter of the current fiscal was registered at 5%, a 25-month low, in the midst of elections-related disruption in government spending.
Analysts feel that the GDP growth for full FY20 could be 5% or slightly above that. This will be a series low, even with the benefit of a relatively favourable base for the second half.
With retail inflation increasing to 4.6% in October, the jury is out on whether the monetary policy committee (MPC) will opt for another rate cut next week — repo rate was cut by 135 bps in 2019 but the transmission has been patchy —, even though most analysts think the panel might still trim the rate by 25 bps before signalling an extended pause. The sectors that were hit the hardest in Q2 included manufacturing where the gross value added (GVA) reported a 1% contraction and a precipitous fall in growth from 12.1% in Q1FY19 and 6.9% in Q2FY19 to 3.1% in Q4FY19 and 0.6% in Q1FY20. Despite consistent government support to the housing segment, the construction sector continued to be in the doldrums, with the GVA growth on year falling from 9.7% in Q3FY19 to 5.7% in Q1FY20 and 3.3% in Q2.
Key services sectors like “trade and hotels, communications, etc,” and “financial services, etc,” also reported growth rates falling, both annually and sequentially.
Nominal GDP grew just 6.1% in Q2, the lowest in 67 quarters, posing additional challenge to the government in adhering to the fiscal glide path, as per which the Centre’s fiscal deficit is to be 3.3% of GDP in FY20. The Budget for the current financial year presented in July assumed a nominal GDP expansion at almost twice that rate.
One redeeming feature is a slight pick-up in private consumption expenditure, with the Q2FY20 growth at 5.1% against 3.1% in the previous quarter, enabling the share of this component in GDP to increase from 55.1% in Q1 to 56.3% in Q2.
At just 1%, growth in gross fixed capital formation in the September quarter was the lowest since the third quarter of FY15 and its share in GDP (31.3%) was the meanest since the second quarter of FY18. It remains to be seen how quickly and meaningfully the investors would respond to the slashing of corporate tax rates in September.
Economic affairs secretary Atanu Chakraborty asserted that the slowdown has now “bottomed out” and that there will be an up-tick in growth in the coming quarters along with a rise in both consumption and investment. Some economists also forecast that the recovery may be around the corner. Sujan Hajra, chief economist at Anand Rathi Securities, said: “Going by the indicators like Diwali and car sales, our sense is that it will pretty much bottom out at this level. There should be a significant recovery in the second half. Corporate tax cut will lead to better performance but how much is definitely a question.”
However, for the post-Q2 period too, available data don’t point to a sanguine picture. Witness the October data: The output of eight core infrastructure industries contracted 5.8% with six of them reporting contraction; direct tax collections down 17% on year; manufacturing stagnant and continued contraction in services as per PMI. Non-food credit growth in the banking system fell to a two-year-low of 7.92% during the fortnight ended November 9. Earlier, the growth had fallen to 8.69% in the fortnight ended September 27 and rose marginally to 8.79% during the fortnight ended October 25, buoyed by the festive season and the customer outreach by PSBs.
Given that goods exports contracted in October, and external headwinds persist due to a global trade war, exports will continue to be a drag on the overall GDP in the coming quarters.
Rupa Rege Nitsure, group chief economist at L&T Financial Services, said low investment confidence was already signalled by a near collapse of financial credit from banks and NBFCs. “Luckily, rural belts have started showing early signs of mild recovery, thanks to improved cash flow prospects for farmers in a few states. Going by the underlying trend and momentum, I don’t expect GDP growth to cross 5% for the full FY20.”
Had the fiscally stressed government not given the economy a desperate push through its expenditure — despite a big slippage in tax revenue, the Centre’s budget capex surged 65% in Q2FY20 from a 28% contraction seen in the previous quarter; state capex also gained momentum in the September quarter —, the Q2 economic growth would have still been lower.
The data on central government finances released on Friday showed growth in budget spend decelerated to 9.1% in October from 34% in September. Support to growth form state governments could also wane in H2 as their revenue growth is slipping. Tax revenue growth of the 17 states reviewed by FE was 2.4% in H1FY20, compared with 13.8% a year ago. As many as eight of these states including Uttar Pradesh, Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh and Telangana, reported a year-on-year decline in their tax revenue growth in the first half.
The MPC has been amenable to growth concerns but banks haven’t been strictly following through on its tips, one reason for which was interest rates offered by the government on small savings deposits remaining elevated. In fact, at 5.14%, the yield on the 364-day T-bill auctioned on Wednesday was lower than the repo rate of 5.15% for the first time since April 2017. In contrast, State Bank of India’s one-year MCLR rate stood at 8%.
Friday’s data could prompt the central bank, which had cut its FY20 GDP growth forecast by a sharp 80 basis points to 6.1% in October, to lower its prediction again next week when the MPC meets.