Fresh debt: GDP growth slows to 25-quarter low of 5 pct in Q1 FY20

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Published: August 31, 2019 6:21:46 AM

Growth of gross value added (GVA) in manufacturing also nosedived to 0.6% in Q1FY20, compared with a rather strong 12.1% in the year-ago quarter and 3.1% in Q4FY19.

GDP growth, GVA, Narendra Modi government, Indian economy, PSE investments, RBI, RBI monetary policy, Moody'sTo achieve the Narendra Modi government’s objective of growing the Indian economy’s size to trillion by 2025 from about .6 trillion now, the aggregate investment rate, analysts say, should increase to 37% of the GDP.

Amplifying fears of a cataclysmic economic slowdown that could have structural reasons other than those emanating from a cyclical downswing, official data showed on Friday India’s real gross domestic product (GDP) growth slumped to a 25-quarter low of 5% in Q1FY20. While a slowing of growth from the 5-year trough of 5.8% reported for Q4 last year was widely predicted, the magnitude of the decline took even the most pessimistic forecasters by surprise.
The slowdown is of course upon an unfavourable base (Q1FY19 saw 8% GDP expansion), but it is also broad-based. Worse, private consumption, the main engine of the economy, appears to have suffered the biggest blow with year-on-year growth of just 3.1% (the lowest since Q3FY15). There has been a swift slide in private consumption since the second quarter of last fiscal when it grew at 9.8%.

Growth of gross value added (GVA) in manufacturing also nosedived to 0.6% in Q1FY20, compared with a rather strong 12.1% in the year-ago quarter and 3.1% in Q4FY19. Construction GVA grew just 5.7% in Q1FY20 versus 9.6% in the year-ago quarter.

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While an investment-led revival is the government’s stated goal, the gross fixed capital formation, a close proxy of investment, grew at a lackadaisical 4% in Q1, only marginally higher than 3.6% growth in Q4FY19. The big growth slowdown over the last two quarters was despite the fiscally stressed government continuing to pump-prime the economy via budgetary and extra-budget expenditure — during Q4FY19 (when GDP expanded at a 5-year low rate of 5.8%), government final consumption expenditure grew a strong 13.1% and the momentum was somewhat maintained with a 8.8% growth in Q1FY20.

Also read: Despite normal monsoon, rice sowing continues to remain low; major cereals also down

To achieve the Narendra Modi government’s objective of growing the Indian economy’s size to $5 trillion by 2025 from about $2.6 trillion now, the aggregate investment rate, analysts say, should increase to 37% of the GDP. In the June quarter, this was only 32.5%.

Over the last few days — and on Friday too —, the government announced a series of steps to give a fillip to consumption and investment.  Since the Centre’s fiscal prowess is limited (its budgetary capital expenditure relative to GDP is about 1.6% or 5% of the aggregate investment) and even central PSEs’ investments are slated to fall from last year’s level in FY20, the government is focusing on ensuring easier access of credit to various sectors of the economy at competitive rates. It is prodding banks to lend and capitalising them to the extent it can, while also facilitating liquidity support to non-banking finance companies, including housing-finance firms.

Of course, there is also an effort to accelerate public spending; the Rs 58,000 crore (64% more than the budgeted) extra received from the RBI as surplus could accentuate this plan. The Centre’s expenditure in Q1FY20 was 25.9% of the budget estimate for the full financial year, lower than trend of around 30% in recent years.

In a sign that the spending momentum has recently been strengthened, July 2019 saw a 24% y-o-y increase in budget expenditure compared to 15.5% in the corresponding month last year, the Controller General of Accounts data showed on Friday. State governments could pitch in this year to augment overall public spending as their overall fiscal position has improved a bit.

On their part, the RBI and monetary policy committee, enabled by a benign inflation environment, have been lending support to the government’s bid to push growth – the benchmark repo rate has been cut by 110 basis points since February and another 25 bps cut is expected in October The RBI said in its annual report 2018-19 on Thursday, “The recent (growth) deceleration could be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural slowdown. Nonetheless, there are still structural issues in land, labour, agricultural marketing and the like, which need to be addressed.”

China’s economy expanded at 6.2% April-June quarter of 2019, which was its weakest expansion in 27 years.
Devendra Pant, chief economist at India Ratings and Research (Fitch Group), said, “Declining savings especially household saving is a major challenge for the economy and is leading to structural growth slowdown… After agriculture, real estate/construction is the second largest employer and also has the huge backward and forward linkages with other sectors. So reviving real estate sector will be crucial both from the investment as well as consumption point of view.”

Rupa Rege Nitsure, group chief economist at L&T Financial Holdings, said: “There is an acute slowdown in the manufacturing and agriculture sectors on the back of a slowdown in aggregate demand — both consumption and investment. In our opinion, the weight of structural factors has gone up in the slowdown and mere monetary stimulus may not work beyond a limit.”

Agriculture GVA expanded 2% in Q1FY20 against 5.1% in the year-ago quarter. Monsoon deficit in the crucial first one-and-half months of the kharif sowing season, coupled with excessive rains in August, that inundated agricultural fields in several states, is likely to drag down production of food grains (rice, pulses and coarse cereals) this season by 3-5% from last year’s 141.71 million tonne, Crisil Research said. However, the effect of a marginal decline in farm output on the agriculture GVA could be partly offset by a likely increase in price realisaion by farmers.

With the escalating trade war between the US and China, Indian economy, there is little chance that India’s exports will gain big momentum in the short to medium term, so net exports (including services) will likely continue to be drag on the country’s economic growth.

Several global institutions have recently cut their growth projections for India. Moody’s last week trimmed India’s GDP growth projection for 2019 by as much as 60 basis points to just 6.2%. IMF had in July pegged its India forecast at 7% for FY20.

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