India’s Gross Domestic Product (GDP) for the July-September quarter has come at 4.5 percent, the lowest growth in at least six-and-half years or in 26 quarters and even worse than the first quarter when the economy grew at 5 percent. This also means that if the Indian economy needs to grow at even 6 percent for the full year, the GDP growth in second half needs to be an average 7.2 percent, which looks improbable as of now.
Full-year growth is likely to end up around 5 percent going by the current cues. More importantly, one must also take note of the big fall in nominal GDP growth that has come at just 6.1 percent, the lowest in so many years. This means, the $5-trillion economy target is a distant dream now, forget the year 2025. According to NITI Aayog’s estimates, India needs to grow at 12.4 percent nominal GDP rate over the next five years to reach the $5-trillion economy target. That’s unlikely.
Remember, in the last 15 years, the average growth of the Indian economy was about 7 percent meaning the growth has nearly halved now. The growth in gross fixed capital formation (GFCF), a key measure to assess investment activity, has plunged to 1 percent compared with 11.8 percent on year-on-year basis. This, of all the numbers, should be the major worry for the government since that indicates the capital formation on the ground is in bad shape. The GFCF figures have been falling in the consecutive quarters since the third quarter of FY19. In the last quarter, GFCF grew by 4 percent and 3.6 percent in the quarter before.
Manufacturing growth has contracted at by 1 percent as compared to a growth of 6.9 percent in the last year. Similarly, agriculture growth has slowed down to 2.1 percent too compared with 4.9 percent a year-ago. Also, growth numbers in construction and electricity sectors have also slowed causing a drag on the overall growth. The full year, the economy may end up with much lower GDP figures than estimated in the past unless the government pumps in money in the second half. This is necessary because the private sector is still on the sidelines and not participating well.
Has the economy bottomed out or is there further pain waiting? The Q2 number conclusively tells us that the economy is sliding further and adds to the woes of the government and central bank tasked with addressing the growth conundrum. Most economists expect the slowdown to continue in the next few quarters before things start looking up. One must note that even for the October month, core sector numbers aren’t looking good. The growth across eight major core sectors have contracted further by 5.8 percent in October, the lowest in over a decade, indicating the severity of economic slowdown. Electricity sector growth has come as a shocker posting de-growth of 12.4 percent.
What now? The Monetary Policy Committee (MPC), which has cut the interest rates by a cumulative 135 basis points so far in this cycle, will have to cut rates further in the backdrop of falling growth, may be by another quarter basis points in the next policy. But, that is unlikely to help much because the banks aren’t lending to productive sectors not because they don’t have money but they don’t have enough credit demand. This is the root cause of bank credit flowing less to industries.
The consumer demand has taken a major hit over the last one year reflecting in the sales figures of companies and causing a rippling effect on government revenues. When the customers postpone their purchases, be it in real estate or consumer goods, it is very difficult for the economic activity to pick up on the ground.
Slowing government revenues indicate the weakness in the economy. So far this fiscal, the total revenue collection of the government has fallen short of the target. In the second quarter, both the government and the private consumption figures have come a tad better than the first quarter but that could also be due to the festive season impact. It is now very clear that the government will have to prepare for fiscal slippage in the current fiscal to find room to spend. The economy, as the economists call it, is passing through a phase of stagflation—a period of low growth, high inflation and high unemployment.
The recent speech of Union Finance minister Nirmala Sitharaman in Parliament on an economic situation shows that government is still on a defensive mood with respect to the worrying state of the economic slowdown, drawing comfort from the fact that we aren’t in a recession yet but only in an economic slowdown. But, the sharp slowdown in the economy in the second quarter should be an eye-opener for the finance minister as large economies, when lose momentum, typically take several years to get back to the high growth period. The fact is that even if India is not in an economic recession yet, the current slowdown is hurting the country significantly.
There have been a number of sector-specific measures announced by Sitharaman so far to revitalise the economy. But, the kind of slowdown experienced by the economy requires much bigger steps from the fiscal authorities. The second-quarter numbers emphasise the fact that the economy has entered a deeper slowdown phase with investment activity nearly stalling. The government will have to forget the fiscal deficit target and get ready to pump in more money in the second half to support growth.
(Data support by Kishor Kadam)
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Updated Date: Nov 29, 2019 21:04:53 IST