Dragged down by a contraction in manufacturing, weak investment, and lower consumption demand, India’s GDP growth rate at 4.5 per cent for Q2, 2019-20, hit a 26-quarter low in July-September, data released by National Statistical Office Friday showed.
This is the lowest quarterly growth rate in the five-and-half years of the Narendra Modi-led NDA government. The previous low was 4.3 per cent during January-March 2012-13.
The Reserve Bank of India (RBI), scheduled to announce its bi-monthly monetary policy statement on December 5, is expected to continue its accommodative monetary policy stance with another repo rate cut to support growth.
Growth rate in terms of Gross Value Added (GVA), which is GDP minus net product taxes and reflects supply-side growth, has slowed to 4.3 per cent in July-September as against 6.9 per cent a year ago. With this, GDP growth rate for April-September, the first half of this fiscal, is now at 4.8 per cent as against 7.5 per cent growth in the year-ago period.
The growth rate has now slowed for the sixth consecutive quarter, declining by 3.6 percentage points during this period.
The nominal GDP growth rate, which accounts for inflation, slowed further from the first quarter to 6.1 per cent in July-September from double-digit level of 12 per cent in the corresponding period last year.
Investment, as measured by gross fixed capital formation, that has been slowing for the last two quarters, grew just 1 per cent in July-September, the data showed.
Manufacturing growth contracted 1 per cent as against 6.9 per cent growth last year during the same quarter, while the “agriculture, forestry and fishing” sector recorded a growth rate of 2.1 per cent as against 4.9 per cent last year. GVA growth for the construction sector also slowed to 3.3 per cent in July-September from 8.5 per cent year ago.
Most economists had expected GDP growth rate for the second quarter to slip to sub-5 per cent level with projections hovering in the 4.2-4.7 per cent range.
At 4.5 per cent, the GDP growth is much lower than 5.3 per cent projected for July-September by the Reserve Bank of India (RBI) in its October policy. For the country to clock a growth rate of even 5 per cent for the full 2019-20 financial year, the economy would now have to grow at least 5.2 per cent in the remaining two quarters of this financial year.
Economists said without the support of higher government expenditure, GDP growth would have been even much lower, with most high frequency data such as non-food credit growth, auto sales and select fast-moving consumer goods already been indicating this slowdown.
“As it is becoming apparent that even festive demand has not been able to lift consumer sentiment and consumption demand, we believe 2HFY20 growth is also likely to be lacklustre resulting in an overall GDP growth of 5.6 per cent 2019-20. The low nominal growth rate of 6.1 per cent in the second quarter also does not augur well both for the government and the corporate sector as tax collection of the government and top line of corporate sector is linked to nominal GDP. However, given the current-growth inflation dynamics, we believe RBI will go for another 25bp rate cut in the forthcoming monetary policy review in December 2019,” said Sunil Kumar Sinha, Principal Economist, India Ratings & Research.
With declining household savings and lower buoyancy in government’s revenue collections, there will be limited fiscal space to spur economic growth. The slowdown is also expected to adversely affect income growth which, in turn, would further dent consumption demand. A favourable low base effect, however, would be seen third quarter onwards, which may help push the headline growth number higher.
All eyes are now on the use of the monetary policy tool through more rate cuts, with most economists expecting RBI to cut repo rate by 25 basis points in the upcoming December policy meet. Experts also said sector-wise demand stimulus, especially focused on the non-banking financial sector, will be the need of the hour.
“Just to depend on another rate cut by RBI in the upcoming MPC meeting may not be sufficient. The situation demands a coordinated fiscal priming in areas with higher multipliers and where spends could be immediately combined with a monetary policy push to address the effective transmission of rate cuts to NBFCs. The effect of rural demand uptick on Q3 numbers will be crucial to avert a sub-5 per cent annual growth rate,” said Ranen Banerjee, Leader Public Finance and Economics, PwC India.