Unabated economic slowdown: Q3 growth at 4.7%

The size of the FY20 nominal GDP is now estimated at Rs 203.85 lakh crore, down from the first advance estimate of Rs 204.42 lakh crore.

India’s economic slowdown, which has been disconcertingly long and steep, did not bottom out even in the December quarter (Q3FY20), with the rate of real GDP expansion in the quarter coming in at 4.7%, a 27-quarter low. Also, the growth is going to be even lower at 4.6% or thereabouts in the fourth quarter of the fiscal, as per the national income data (second advance estimate for FY20) released by the National Statistics Office (NSO) on Friday, amid uncertainties over the extent of damage that the still-unbridled coronavirus pandemic could inflict on the global economy and the resultant supply and demand disruptions to Indian economy.

The NSO revised the GDP expansion rate for Q2FY20 upwards to 5.1% from 4.5% estimated earlier. It, however, retained the FY20 GDP growth estimate at 5%, the same level as in the first advance estimate released in early January; such growth would be the worst since 2008-09.

The size of the FY20 nominal GDP is now estimated at Rs 203.85 lakh crore, down from the first advance estimate of Rs 204.42 lakh crore; upon the FY19 base (last revised on January 31), nominal GDP growth for the current fiscal is now pegged at 7.5% (a 42-year low), against 7.8% computed on the revised base previously.
Speaking to reporters,economic affairs secretary Atanu Chakraborty asserted that the slowdown has now bottomed out. However, private analysts were less sanguine.

In proof that green shoots of recovery aren’t yet sturdy and conspicuous, negative or flat growth rates were reported by key sectors like manufacturing (-0.2%), construction (0.3%), “electricity, gas, water and utility services” (-0.7%) in Q3. In fact, these sectors witnessed continuous, if not precipitous decline in gross value added (GVA) growth rates over several quarters to Q3. Continued weakness of credit flows – non-food credit growth crashed to just 6.3% year-on-year in the fortnight through February 14, the lowest since May 2017 – and anaemic exports too are drags on growth.

The deep cut in corporate tax rates announced in September did not bring about a prompt revival in private investments: growth of gross fixed capital formation, a close proxy of investments, declined from 4.6% in Q1FY20 to (-)4.1% in Q2 and (-)5.2% in Q3. Amid the near-pervasive gloom, one sliver lining is a moderate pick-up in private consumption, the main engine of growth. Growth of private final consumption expenditure (PFCE) rose from a 5% in Q1FY20 to 5.6% in Q2 and further to 5.9% in Q3; correspondingly, PFCE’s share in GDP grew from 55.8% in Q2 to 59.1% in Q3. Also, normal monsoon and robust kharif crop have boosted farm-sector gross value added.

While analysts differ on whether the Budget FY21 held the promise of providing a stimulus to the economy – even the Monetary Policy Committee is split on whether the Budget’s net fiscal impact would be contractionary or stimulating – Q3 data showed government spending slowed a bit. Growth in government final consumption expenditure fell from 13.2% in Q2 to 11.8% in Q3.

The Controller General of Accounts (CGA) data released separately showed that the Centre’s budgetary expenditure growth declined from a robust 34% in September to 9.1% in October to 5.5% in November and further to 3.2% in December and (-)6.4% in January. The state governments have also lately curbed their capex while central PSUs are apparently holding the fort with robust capex levels.

Among the positives are an increase in the composite (manufacturing and services) PMI Output Index to 56.3 in January from 53.7 in December and the fact that rural inflation rate rose faster than urban inflation for the first time in 19 months in January, signalling a revival in rural demand.

Abheek Barua, chief economist at HDFC Bank, said: “With a likely impact of the coronavirus beginning to play out in the last quarter and expenditure compression by the government, last quarter GDP growth could disappoint. This could mean that GDP for the year could be lower than 5%.” China is India’s biggest supplier of intermediate goods, worth about $30 billion annually, across sectors like pharma, electronics, textiles and chemicals.

Stunted input imports will impinge on merchandise exports that have already contracted for a sixth straight month through January. The impact of net exports, which continue to be a drag on GDP, can, therefore, potentially exacerbate in the fourth quarter. As such, the share of exports (in real term) in GDP has been shrinking – from 20% in Q1 to 19.3% in Q3.

A record kharif grain harvest on the back of normal monsoon showers and an all-time-high horticulture output improved farm prospects in the second half of this fiscal. A favourable base on top of it pushed up GDP growth for the third quarter to a decent 3.5%, the highest in six quarters and against 2% a year before. The forecast of a bumper rabi crop augurs well for the first quarter of the next fiscal, when harvesting will take place.

Analysts, however, were spilt in their assessment of whether the MPC would opt for a rate cut in its next review meeting in April, given the elevated retail inflation despite signs of moderation. At its latest bi-monthly review, the MPC resolved to keep the repo unchanged at 5.15% – it had last cut the rate at October review (by 25 bps) – and “continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target”.

Aditi Nayar, principal economist at ICRA, said: “The sharp 5.2% contraction in gross fixed capital formation in Q3 underscores the tepid investment sentiment, as well as the y-o-y decline in capital spending by state governments, a fallout of their fiscal constraints.”

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