India’s economy grew 4.5% in the July-September quarter (the second quarter of fiscal 2019-20), the slowest pace of expansion since March 2013, hurt by inadequate revival in consumption and stagnant investment, with only strong government spending preventing an even steeper slowdown.
The latest numbers mark the longest continuous deceleration in gross domestic product (GDP) growth, which has been slowing for six straight quarters. Top officials of the finance ministry said the worst was over and the economy will grow faster in the last two quarters of the current financial year, although high-frequency indicators and anecdotal accounts are yet to reflect this.
The index of eight core sector industries contracted by 5.8% on a year-on-year basis in October. This is the second consecutive monthly contraction after September, when the index shrank 5.1%. Crop destruction due to excess rains in the past month might adversely affect agricultural growth in the third quarter.
Friday’s numbers put India’s GDP growth in the first half of the current fiscal year at 4.8%, the lowest since the new GDP series was launched in 2012-13.
Addressing reporters immediately after announcement of the GDP numbers, Department of Economic Affairs (DEA) secretary Atanu Chakraborty and chief economic adviser (CEA) KV Subramanian said the country’s economic fundamentals were strong, and that consumption and investment were expected to pick up in the subsequent quarters.
“The economy has bottomed out,” Chakraborty said, adding that the fundamentals of the Indian economy were very strong, as reflected in factors such as “low inflation, macro-economic stability, low fiscal deficit and good foreign reserves”.
Rumki Majumdar, economist, Deloitte India, an audit firm, agreed: “Compared to the past four slowdown cycles, several economic fundamentals are in much better shape today. Inflation is low and is expected to remain so because of the excess capacity in the economy.”
Earlier this week, finance minister Nirmala Sitharaman indicated as much in Parliament. On Thursday, she put out a series of tweets highlighting her government’s record at keeping inflation under control, growing manufacturing faster, and maintaining the fiscal health of the economy. “Marcroeconomic fundamentals of India are strong under the Narendra Modi led NDA government,” she tweeted.
Sitharaman said in Parliament earlier this week that the government had taken 32 measures to address issues faced by the various sectors. These include a cut in corporate taxes, a real estate fund aimed at reviving incomplete projects, the merger of banks, and a large-scale disinvestment exercise.
The low GDP growth numbers provoked an immediate attack by the opposition. “The economy has been pushed into a coma by the BJP, the Prime Minister, and the Finance Minister,” Congress spokesperson Randeep Singh Surjewala told reporters.
“Lowest GDP growth in 26 quarters! No answers from FM….”, All India Trinamool Congress MP Derek O’Brien said.
The GDP growth is 50 basis points lower than what it was in the April-June quarter. One basis point is one hundredth of a percentage point. Both figures are the lowest since March 2013, when GDP growth plummeted to 4.3%. Gross Value Added (GVA), which actually measures the value of goods and services produced in the economy, was 4.3% in the quarter ended September, the lowest in the current GDP series.
In terms of sector-wise performance, industry recorded its worst ever quarterly growth rate of 0.5% since June 2012, the earliest period for which GVA growth data is available under the new series. Manufacturing contracted by 1%. The only other time manufacturing contracted under the new series was in June 2017, which many believe was a result of companies disposing of inventories to pre-empt the implementation of the Goods and Services Tax (GST) in July 2017. Service sector growth fell to 6.8%, the lowest since 5.3% in March 2014.
Private Final Consumption Expenditure, which accounts for more than 50% of GDP, made a recovery in the quarter, growing at 5.1% from 3.1% in the first quarter, although some experts said that on-ground evidence of rising exception is patchy. Gross Fixed Capital Formation, a measure of investment by firms, only grew at 1%, the lowest since December 2014, when it grew at 0.8%.
The other major takeaway from the latest GDP numbers is a collapse in the nominal growth rate. Nominal GDP growth was only 6.1% in the quarter, the lowest since March 2009, when it crashed to just 5.6%. Nominal GDP growth was 8% in the first quarter. Nominal growth rates form the basis of tax estimates in the budget, as taxes are a proportion of nominal rather than real GDP. This year’s budget assumed 12% growth in nominal GDP for the current fiscal year.
The nominal GDP numbers might continue to be grim even in the third quarter, as the GDP deflator – difference between growth at current and constant prices – seems to be following the Wholesale Price Index (WPI) rather than the Consumer Price Index (CPI). CPI and WPI growth in the quarter was 3.5% and 0.9% respectively. The GDP deflator in the September quarter was 1.5 percentage points. These two inflation metrics have diverged even further, with the WPI going down and the CPI increasing. A massive shortfall in nominal GDP growth, a reduction in corporate tax rates — according to the government’s estimates this will lead to a revenue loss of ~1.45 lakh crore — is bound to create a major disruption in this year’s fiscal math.
GST collections have been less than Rs.1 lakh crore for more three consecutive months ending October. Reuters reported on Friday that India’s April to October fiscal deficit had already crossed the entire year’s budget target. Earlier this week, the government extended the tenure of the 15th Finance Commission – a constitutional body which prepares the roadmap for sharing of resources between Centre and the states every five years – by another year. Growing uncertainly around revenue collections will only complicate the Finance Commission’s tax math.
Economists said the numbers are worrying. “Manufacturing growth has turned negative, core sector industry index is contracting by 6% — these are signs of a serious crisis of production in the economy”, said Himanshu, an associate professor of economics at Jawaharlal Nehru University. Spiralling food inflation and growing concern about the economy will only make things worse, and complicate a recovery, unless the government does something, he added.
Another expert said the poor GDP number for the second quarter was expected and strong policy measures are required to boost the sagging economy. Ranjen Banerjee, leader of the public finance and economics practice at PwC India, an audit and consulting firm, said it was clear that monetary interventions are not working — RBI has cut rates by 1.35 percentage points this year — and called for a fiscal stimulus in “areas with higher multipliers and where spends could be immediate” and a “monetary policy push to address the effective transmission of rate cuts to the NBFCs [non-banking finance companies]”. He also emphasised the importance of revival in rural demand to “avert a 5% annual growth rate”.
Majumdar, however, expressed the belief that things will be better in the coming quarters. He pointed to the slew of measures taken by the government and said their impact will be felt with a lag.
Former Prime Minister Manmohan Singh, however, sought to link the slowdown to what he termed the “state of society”.
Speaking at a seminar in Delhi, he said the GDP growth rate of 4.5% was unacceptable and worrisome. “Aspiration of our country is to grow at 8-9%. The sharp decline of GDP from 5% in Q1 to 4.5% in Q2 is worrisome. Mere changes in economic policies will not help revive the economy,” he said.
“We need to change the current climate in our society from one of fear to one of confidence for our economy to start growing at 8% per annum. The state of the economy is a reflection of the state of its society. Our social fabric of trust and confidence is now torn and ruptured,” he added
